23516 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

1Federal Deposit Insurance Reform Act of 2005, 

Public Law 109–171, 120 Stat. 9; Federal Deposit 

Insurance Conforming Amendments of 2005, Public 

Law 109–173, 119 Stat. 3601. 

2Section 2109(a)(5) of the Reform Act. Section 

7(b) of the Federal Deposit Insurance Act (12 U.S.C. 

1817(b)). 

3Section 7(b)(1)(D) of the Federal Deposit 

Insurance Act (12 U.S.C. 1817(b)(1)(D)). 

4Section 2104(a)(2) of the Reform Act amending 

Section 7(b)(2)(D) of the Federal Deposit Insurance 

Act (12 U.S.C. 1817(b)(2)(D)). 

5 71 FR 69282. (Nov. 30, 2006). The FDIC also 

adopted several other final rules implementing the 

Reform Act, including a final rule on operational 

changes to part 327. 71 FR 69270 (Nov. 30, 2006). 

6The 2006 final rule defined a large institution 

as an institution (other than an insured branch of 

a foreign bank) with $10 billion or more in assets 

as of December 31, 2006 (although an institution 

with at least $5 billion in assets could request 

treatment as a large institution). If, after December 

31, 2006, an institution classified as small reports 

assets of $10 billion or more in its report of 

condition for four consecutive quarters, the FDIC 

will reclassify the institution as large beginning in 

the following quarter. If, after December 31, 2006, 

an institution classified as large reports assets of 

less than $10 billion in its report of condition for 

four consecutive quarters, the FDIC will reclassify 

the institution as small beginning the following 

quarter. 12 CFR 327.8(g) and (h) (2009) and 

327.9(d)(6) (2009). 

7 71 FR 69282, 69292–69294 (Nov. 30, 2006). 

8 72 FR 27122 (May 14, 2007). 

9The financial ratios method also applies to large 

institutions without at least one long-term debt 

rating. The 2009 assessments rule added a new 

measure—the adjusted brokered deposit ratio—to 

the financial ratios that were considered under the 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 327 

RIN 3064–AD57 

Assessments 

AGENCY: Federal Deposit Insurance 

Corporation. 

ACTION: Notice of proposed rulemaking 

and request for comment. 

SUMMARY: The FDIC proposes to amend 

our regulations to revise the assessment 

system applicable to large institutions to 

better differentiate institutions by taking 

a more forward-looking view of risk; to 

better take into account the losses that 

the FDIC will incur if an institution 

fails; to revise the initial base 

assessment rates for all insured 

depository institutions; and to make 

technical and other changes to the rules 

governing the risk-based assessment 

system. 

DATES: Comments must be received on 

or before 60 days after publication. 

ADDRESSES: You may submit comments, 

identified by RIN number, by any of the 

following methods: 

• Agency Web Site: http:// 

www.fdic.gov/regulations/laws/federal/ 

propose.html. Follow instructions for 

submitting comments on the Agency 

Web Site. 

• E-mail: Comments@FDIC.gov. 

Include the RIN number in the subject 

line of the message. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments, Federal 

Deposit Insurance Corporation, 550 17th 

Street, NW., Washington, DC 20429 

• Hand Delivery/Courier: Guard 

station at the rear of the 550 17th Street 

Building (located on F Street) on 

business days between 7 a.m. and 5 p.m. 

Instructions: All submissions received 

must include the agency name and RIN 

for this rulemaking. Comments will be 

posted only to the extent practicable 

and, in some instances, the FDIC may 

post summaries of categories of 

comments, with the comments 

themselves available in the FDIC’s 

reading room. Comments will be posted 

at: http://www.fdic.gov/regulations/ 

laws/federal/propose.html, including 

any personal information provided with 

the comment. 

FOR FURTHER INFORMATION CONTACT: Lisa 

Ryu, Chief, Large Bank Pricing Section, 

Division of Insurance and Research, 

(202) 898–3538; Heather L. Etner, 

Financial Analyst, Banking and 

Regulatory Policy Section, Division of 

Insurance and Research, (202) 898– 

6796; Robert L. Burns, Chief, Exam 

Support and Analysis, Division of 

Supervision and Consumer Protection 

(704) 333–3132 x4215; Christopher 

Bellotto, Counsel, Legal Division, (202) 

898–3801; Sheikha Kapoor, Senior 

Attorney, Legal Division, (202) 898– 

3960. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Reform Act 

On February 8, 2006, the President 

signed the Federal Deposit Insurance 

Reform Act of 2005 into law; on 

February 15, 2006, he signed the Federal 

Deposit Insurance Reform Conforming 

Amendments of 2005 (collectively, the 

Reform Act).1 The Reform Act, among 

other things, gives the FDIC, through its 

rulemaking authority, the opportunity to 

better price deposit insurance for risk.2

The Federal Deposit Insurance Act, as 

amended by the Reform Act, requires 

that the assessment system be risk-based 

and allows the FDIC to define risk 

broadly. It defines a risk-based system 

as one based on an institution’s 

probability of causing a loss to the 

Deposit Insurance Fund (the Fund or 

the DIF) due to the composition and 

concentration of the institution’s assets 

and liabilities, the likely amount of any 

such loss, and the revenue needs of the 

DIF. The Reform Act leaves in place the 

statutory provision allowing the FDIC to 

‘‘establish separate risk-based 

assessment systems for large and small 

members of the Deposit Insurance 

Fund.’’ 3 But the Reform Act provides 

that ‘‘[n]o insured depository institution 

shall be barred from the lowest-risk 

category solely because of size.’’ 4

2006 Assessments Rule 

On November 30, 2006, pursuant to 

the requirements of the Reform Act, the 

FDIC adopted by regulation (the 2006 

assessments rule) an assessment system 

that placed insured depository 

institutions into risk categories (Risk 

Category I, II, III or IV), depending upon 

supervisory ratings and capital levels.5

Within Risk Category I, the 2006 

assessments rule created different 

assessment systems for large and small 

institutions that combined supervisory 

ratings with other risk measures to 

further differentiate risk and determine 

assessment rates.6

To determine assessment rates for 

large Risk Category I institutions that 

had a long-term debt issuer rating, the 

2006 assessments rule combined the 

institution’s weighted average CAMELS 

component rating and any current longterm debt issuer rating or ratings 

assigned by the major U.S. rating 

agencies (the debt ratings method). For 

large institutions that did not have a 

long-term debt issuer rating, the rule set 

initial assessment rates using a financial 

ratios method, which combined the 

weighted average CAMELS component 

rating and certain financial ratios. (This 

method was also applied to all small 

institutions.) The 2006 assessments rule 

allowed the FDIC to adjust initial 

assessment rates for large Risk Category 

I institutions to ensure that the relative 

levels of risk posed by these institutions 

were consistently reflected in 

assessment rates; the adjustment is 

known as the large bank adjustment.7

The FDIC provided additional detail on 

the calculation of the large bank 

adjustment in its Guidelines for Large 

Institutions and Insured Foreign 

Branches in Risk Category I (the large 

bank guidelines).8

2009 Assessments Rule 

Effective April 1, 2009, the FDIC 

amended its assessments rule (the 2009 

assessments rule) to create the current 

assessment system. Under this 

assessment system, the initial base 

assessment rate for a Risk Category I 

institution is determined by either the 

financial ratios method applicable to all 

small institutions or, for institutions 

with at least one long-term debt rating, 

by a new large bank method.9 The new 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23517 

2006 assessments rule. The adjusted brokered 

deposit ratio measures the extent to which certain 

brokered deposits are used to fund rapid asset 

growth. The adjusted brokered deposit ratio 

excludes deposits that a Risk Category I institution 

receives through a deposit placement network on a 

reciprocal basis, such that: (1) For any deposit 

received, the institution (as agent for depositors) 

places the same amount with other insured 

depository institutions through the network; and (2) 

each member of the network sets the interest rate 

to be paid on the entire amount of funds it places 

with other network members (reciprocal deposits). 

10 74 FR 9525, 9535–9536 (Mar. 4, 2009). 

11Unsecured debt excludes debt guaranteed by 

the FDIC under its Temporary Liquidity Guarantee 

Program. 

12The initial base assessment rate cannot increase 

more than 50 percent as a result of the secured 

liability adjustment. 

13 74 FR 9522, 9541 (Mar. 4, 2009). 

large bank method incorporates a 

financial ratios score. For a large 

institution in Risk Category I with a 

long-term debt issuer rating, the initial 

base assessment rate combines the 

institution’s weighted average CAMELS 

component rating, its average long-term 

debt issuer ratings, and its financial 

ratios score, each equally weighted (the 

large bank method). The 2009 

assessments rule also increased the 

maximum large bank adjustment of the 

initial base assessment rate from 0.50 

basis points to 1 basis point.10

Initial base assessment rates as of 

April 1, 2009, are set forth in Table 1 

below. 

TABLE 1—INITIAL BASE ASSESSMENT RATES AS OF APRIL 1, 2009 

Risk category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ................................................................. 12 16 22 32 45 

* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates. 

The 2009 assessments rule provided 

for adjustments to the initial base 

assessment rate for institutions in all 

risk categories. An institution’s total 

base assessment rate can vary from its 

initial base assessment rate as the result 

of an unsecured debt adjustment and a 

secured liability adjustment. The 

unsecured debt adjustment lowers an 

institution’s initial base assessment rate 

using its ratio of long-term unsecured 

debt (and, for small institutions, certain 

amounts of Tier 1 capital) to domestic 

deposits.11 The secured liability 

adjustment increases an institution’s 

initial base assessment rate if the 

institution’s ratio of secured liabilities 

to domestic deposits is greater than 25 

percent (the secured liability 

adjustment).12 In addition, institutions 

in Risk Categories II, III and IV are 

subject to an adjustment for large levels 

of brokered deposits (the brokered 

deposit adjustment).13

After applying all possible 

adjustments, the minimum and 

maximum total base assessment rates for 

each risk category under the 2009 

assessments rule are set out in Table 2 

below. 

TABLE 2—INITIAL AND TOTAL BASE ASSESSMENT RATES

Risk category 

I 

Risk category 

II 

Risk category 

III 

Risk category 

IV 

Initial base assessment rate ............................................................................ 12–16 22 32 45 

Unsecured debt adjustment ............................................................................. ¥5–0 ¥5–0 ¥5–0 ¥5–0 

Secured liability adjustment ............................................................................. 0–8 0–11 0–16 0–22.5 

Brokered deposit adjustment ........................................................................... ........................ 0–10 0–10 0–10 

Total Base Assessment Rate ................................................................... 7–24bp 17–43bp 27–58bp 40–77.5bp 

All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or maximum rate will vary between 

these rates. 

II. Overview of the Proposal 

The FDIC proposes to revise the 

assessment system applicable to large 

institutions to better capture risk at the 

time an institution assumes the risk, to 

better differentiate institutions during 

periods of good economic and banking 

conditions based on how they would 

fare during periods of stress or 

economic downturns, and to better take 

into account the losses that the FDIC 

may incur if an institution fails. 

The FDIC has carefully considered the 

measurements that should be used to 

assess large banks’ risk. The proposal 

includes quantitative measures that are 

readily available and statistically 

significant in predicting an institution’s 

long-term performance. The FDIC 

believes that other considerations—such 

as stress testing, underwriting 

characteristics, and risk management 

practices—are also important in the risk 

assessment of large institutions, and 

they should be factored into the riskbased assessment system. While the 

FDIC has already identified some key 

metrics for these additional 

considerations, the FDIC is seeking 

further input in a request for comments 

included in this proposed rulemaking. 

The FDIC also anticipates that any final 

rule issued pursuant to this notice of 

proposed rulemaking would be followed 

by discussions with the industry on 

ways to improve the system adopted, as 

well as coordination with other 

regulators. Ultimately, the FDIC 

anticipates a further round of 

rulemaking may be needed to improve 

the large bank assessment system 

adopted pursuant to this rulemaking. 

The FDIC proposes to eliminate risk 

categories for large institutions to allow 

the FDIC to draw finer distinctions 

among large institutions based upon the 

risk that they pose. For all large 

institutions, the FDIC proposes to 

eliminate use of long-term debt issuer 

ratings. The FDIC has found that debt 

issuer ratings, particularly for the largest 

institutions, do not respond quickly to 

an institution’s changing risk profile. 

The FDIC proposes to continue to rely 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23518 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

14The proposed rule clarifies that if the FDIC 

disagrees with the ratings changes to an 

institution’s risk assignment by its primary federal 

regulator or, for state-chartered institutions, by the 

state banking supervisor, the FDIC will notify the 

institution of its decision and any resulting change 

to an institution’s risk assignment is effective as of 

the date of FDIC’s transmittal notice. 

15The expert judgment ranking is a risk ranking 

of large institutions based on FDIC’s current 

analyses. The ranking is largely based on the 

information available through the FDIC’s Large 

Insured Depository Institution (LIDI) program. Large 

institutions that failed or received significant 

government support over the period are assigned 

the worst risk ranking and are included in the 

statistical analysis. Appendix 1 describes the 

statistical analysis in detail. 

upon CAMELS ratings and financial 

measures to determine assessment 

rates.14

The FDIC proposes to combine 

CAMELS ratings and certain financial 

measures into two scorecards—one for 

most large institutions and another for 

large institutions that are structurally 

and operationally complex or that pose 

unique challenges and risks in case of 

failure (Highly Complex Institutions). 

Each scorecard would consist of a 

performance component, which would 

measure an institution’s financial 

performance and its ability to withstand 

stress, and a loss severity component, 

which would correspond to the level of 

potential losses in case of failure. The 

data underlying these measures are 

readily available. Most of the data are 

publicly available, but some are 

gathered during the examination 

process. Under the proposal, the FDIC 

would have the ability to adjust each 

component where necessary to produce 

accurate relative risk rankings. 

Because some of the financial 

measures that the FDIC is proposing 

focus on long-term risk, they should 

mitigate the pro-cyclicality of the 

current system. Over the long term, 

institutions that pose higher long-term 

risk will pay higher assessments when 

they assume these risks—usually during 

economic expansions—rather than 

facing large assessment increases when 

conditions deteriorate. In so doing, they 

should provide incentives for 

institutions to avoid excessive risk 

during economic expansions. 

As shown in Chart 1, the proposed 

measures were useful in predicting 

long-term performance of large 

institutions over the 2005 to 2009 

period. The chart contrasts the 

predictive values of the proposed 

measures with weighted-average 

CAMELS component ratings and with 

the existing financial ratios method. 

(The financial ratios method is based on 

a statistical model that predicts 

downgrades of small banks within 12 

months, but the method also applies to 

large Risk Category I banks.) The 

proposed measures predict the FDIC’s 

view, based on its experience and 

judgment, of the proper rank ordering of 

risk for large institutions do 

significantly better than the other two 

methods and, thus, better than the 

current system used for most large Risk 

Category I institutions, which combines 

weighted-average CAMELS composite 

scores, the financial ratios method and 

long-term debt issuer ratings. (As noted 

above, debt issuer ratings, particularly 

for the largest institutions, do not 

respond quickly to an institution’s 

changing risk profile.) For example, in 

2006, the proposed measures would 

have predicted the FDIC’s expert 

judgment-based risk ranking of large 

institutions as of year-end 2009 nearly 

two and one-half times better than the 

risk measures in the existing financial 

ratios method, which applies to large 

banks without debt ratings. 

The FDIC also proposes to alter 

assessment rates applicable to all 

insured depository institutions to 

ensure that the revenue collected under 

the new assessment system would 

approximately equal that under the 

existing assessment system and also to 

ensure that the lowest rate applicable to 

both small and large institutions would 

be the same. The FDIC would retain its 

flexibility to raise assessment rates up to 

3 basis points above or below base 

assessment rates without the necessity 

of further rulemaking. 


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Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23519 

16 In almost all cases, an institution that has had 

$10 billion or greater in total assets for four 

consecutive quarters will have CAMELS ratings. 

However, in the rare event that a large institution 

has not yet received CAMELS ratings, it would be 

given a weighted average CAMELS rating of 2 for 

assessment purposes until actual CAMELS ratings 

are assigned. 

III. Risk-Based Assessment System for 

Large Insured Depository Institutions 

A ‘‘large institution’’ would continue 

to be defined under the proposal as an 

insured depository institution with $10 

billion or greater in total assets for at 

least four consecutive quarters. The 

proposal would apply to all large 

institutions regardless of whether they 

are defined as new.16 Insured branches 

of foreign banks would not be defined 

as large institutions. 

A. Scorecard for Large Institutions 

(Other Than Highly Complex 

Institutions) 

The scorecard method would use risk 

measures to derive an assessment rate 

reflective of the risk that an institution 

poses to the insurance fund. Each 

scorecard would produce two scores: A 

performance score and a loss severity 

score. To arrive at a performance score, 

the scorecard would combine CAMELS 

ratings and financial measures into a 

single performance score between 0 and 

100. The FDIC would have limited 

ability to adjust an institution’s 

performance score based upon 

quantitative or qualitative measures not 

adequately captured in the scorecard. 

The scorecard would also combine 

loss severity measures into a single loss 

severity score between 0 and 100. The 

loss severity score would then be 

converted into a loss severity measure. 

The FDIC would also have limited 

ability to alter an institution’s loss 

severity score based upon quantitative 

or qualitative measures not adequately 

captured in the scorecard. Multiplying 

the performance score by the loss 

severity measure would produce a 

combined score, which would then be 

converted to an initial assessment rate. 

In general, a risk measure value 

reflecting lower risk than the cutoff 

value that results in a score of 0 would 

also receive a score of 0, where 0 equals 

the lowest risk for that measure. A risk 

measure value reflecting higher risk 

than the cutoff value that results in a 

score of 100 would also receive a score 

of 100, where 100 equals the highest 

risk for that measure. A risk measure 

value between the cutoff values would 

be converted to a score between 0 and 

100, which would be rounded to 3 

decimal points. 

Table 3 shows scorecard measures 

and the possible range of scores. 

TABLE 3—SCORECARD FOR LARGE INSTITUTIONS

Components Scorecard measures Score 

CAMELS ..................................................... Weighted Average CAMELS .......................................................................................... 25–100 

Ability to Withstand Asset-Related Stress Tier 1 Common Capital Ratio (Tier 1 Common Capital/Total Average Assets less 

Disallowed Intangibles).

0–100 

Concentration Measure ...................................................................................................

Higher Risk Concentrations; or 

Growth-Adjusted Portfolio Concentrations. 

0–100 

Core Earnings/Average Total Assets ............................................................................. 0–100 

Credit Quality Measure ...................................................................................................

Criticized and Classified Items/Tier 1 Capital and Reserves; or 

Underperforming Assets/Tier 1 Capital and Reserves. 

0–100 

Subtotal ........................................................................................................................... 0–100 

Outlier Add-ons 

Criticized and Classified Items/Tier 1 Capital and Reserves; or 30 

Underperforming Assets/Tier 1 Capital and Reserves.

Higher Risk Concentrations ............................................................................................ 30 

Total ability to withstand asset-related stress score ................................................... 0–160 

Ability to Withstand Funding-Related 

Stress.

Core Deposits/Total Liabilities ........................................................................................ 0–100 

Unfunded Commitments/Total Assets ............................................................................ 0–100 

Liquid Assets/Short-term Liabilities (liquidity coverage ratio) ......................................... 0–100 

Total ability to withstand funding-related stress score ................................................ 0–100 

Total Performance Score ................................................................................................ 0–100 

Potential Loss Severity .............................. Potential Losses/Total Domestic Deposits (loss severity measure) .............................. 0–100 

Secured Liabilities/Total Domestic Deposits .................................................................. 0–100 

Total loss severity score ................................................................................................. 0–100 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23520 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

17This process, in effect, normalizes all the ratios 

to the same range of values and allows the numbers 

to be added together. 

18The higher-risk concentration measure gauges 

concentrations that are currently deemed to be high 

risk. The growth-adjusted portfolio concentration 

measure does not solely consider high-risk 

portfolios, but considers all portfolio 

concentrations. 

19The criticized and classified items ratio 

measures commercial credit quality while the 

underperforming assets ratio is often a better 

indicator for consumer portfolios. 

20Cutoff values are rounded to one decimal point. 

21The measures in which the 10th and 90th 

percentiles would not be used would be the higherrisk concentration measure and the criticized and 

classified asset ratio due to data availability. Data 

on the higher-risk concentration measure are 

available consistently since second quarter 2008, 

and criticized and classified assets are only 

available consistently since first quarter 2007. For 

the higher-risk concentration measure, the 85th 

percentile value is used as a maximum cutoff value. 

The maximum cutoff value for the criticized and 

classified asset ratio is close to but does not equal 

the 90th percentile value. These alternative cutoff 

values are partly based on recent experience. 

1. Performance Score 

The first component of the scorecard 

for large institutions would be the 

performance score. The performance 

score for large institutions would be the 

weighted average of three inputs: 

(1) Weighted average CAMELS rating; 

(2) ability to withstand asset-related 

stress measures; and (3) ability to 

withstand funding-related stress 

measures. Table 4 shows the weight 

given to each of these three inputs. 

TABLE 4—PERFORMANCE SCORE

INPUTS AND WEIGHTS

Performance score inputs Weight 

(percent) 

CAMELS Rating ......................... 30 

Ability to Withstand Asset-Related Stress ............................. 50 

Ability to Withstand Funding-Related Stress ............................. 20 

a. Weighted Average CAMELS Score 

To derive the weighted average 

CAMELS score, a weighted average of 

an institution’s CAMELS component 

ratings would first be calculated using 

the weights that are applied in the 

current rule as shown in Table 5 below. 

TABLE 5—WEIGHTS FOR CAMELS 

COMPONENT RATINGS

CAMELS component Weight 

(percent) 

C ................................................. 20 

A ................................................. 20 

M ................................................. 25 

E ................................................. 10 

L .................................................. 10 

S ................................................. 10 

A weighted average CAMELS rating 

would be converted to a score that 

ranges from 25 to 100. A weighted 

average rating of 1 would equal a score 

of 25 and a weighted average of 3.5 or 

greater would equal a score of 100. 

Weighted average CAMELS ratings 

between 1 and 3.5 would be assigned a 

score between 25 and 100. The score 

would increase at an increasing rate as 

the weighted average CAMELS rating 

increases. 

Weighted average CAMELS ratings 

between 1 and 3.5 would be assigned a 

score between 25 and 100 according to 

the following equation: 

S = 25 + [(20/3) * (C2 ¥ 1)], 

Where: 

S = the weighted average CAMELS score and 

C = the weighted average CAMELS rating. 

This equation normalizes the weighted 

average CAMELS score to the same range as 

the other components described below so 

that it can be added to these components, 

resulting in a performance score. This 

conversion from a weighted average CAMELS 

rating to a score is a non-linear conversion. 

Other conversions used in this proposal 

would be linear. The non-linear conversion 

recognizes that the difference between higher 

CAMELS ratings (e.g., a CAMELS 3 versus a 

CAMELS 4) represents a greater difference in 

risk than the difference between lower 

CAMELS ratings (e.g., a CAMELS 1 versus a 

CAMELS 2). 

b. Ability To Withstand Asset-Related 

Stress Component 

The ability to withstand asset-related 

stress component would contain 

measures that are most relevant to 

assessing a large institution’s ability to 

withstand such stress. These measures 

would be the following: 

• Tier 1 common capital ratio; 

• Concentration measure (the higher 

of the higher-risk concentrations 

measure or growth-adjusted portfolio 

concentrations measures); 

• Core earnings/average total assets; 

and 

• Credit quality measure (the higher 

of the criticized and classified items/ 

Tier 1 capital and reserves or 

underperforming assets/Tier 1 capital 

and reserves). 

In general, these measures proved to 

be the most statistically significant 

measures of an institution’s ability to 

withstand asset-related stress, as 

described in Appendix 1. Appendix B 

describes these measures in detail and 

gives the source of the data used to 

determine them. 

Each risk measure within the ability 

to withstand asset-related stress portion 

of the scorecard would be converted 

linearly to a score between 0 and 100 

where 100 equals the highest risk and 0 

equals the lowest risk for that 

measure.17 For each risk measure, a 

value reflecting lower risk than the 

cutoff value that results in a score of 0 

will also receive a score of 0, where 0 

equals the lowest risk for that measure. 

A value reflecting higher risk than the 

cutoff value that results in a score of 100 

will also receive a score of 100, where 

100 equals the highest risk for that 

measure. A risk measure value between 

the minimum and maximum cutoff 

values is converted linearly to a score 

between 0 and 100. For the 

Concentration Measure and Credit 

Quality Measures, a lower ratio implies 

lower risk and a higher ratio implies 

higher risk. For these measures, a value 

between the minimum and maximum 

cutoff values will be converted linearly 

to a score between 0 and 100, according 

to the following formula: 

S = (V ¥ Min)*100/(Max ¥ Min), 

where S is score (rounded to three decimal 

points), V is the value of the measure, Min 

is the minimum cutoff value and Max is the 

maximum cutoff value. 

For the Tier 1 Common Capital Ratio 

and Core Earnings to Average Total 

Assets Ratio, a lower value represents 

higher risk and a higher value 

represents lower risk. For these 

measures, a value between the 

minimum and maximum cutoff values 

is converted linearly to a score between 

0 and 100, according to the following 

formula: 

S = (Max ¥ V)*100/(Max ¥ Min), 

where S is score (rounded to three decimal 

points), V is the value of the measure, Min 

is the minimum cutoff value and Max is the 

maximum cutoff value. 

The concentration measure score 

would equal the higher of the two scores 

that make up the concentration measure 

score, as would the credit quality 

score.18 The credit quality score would 

be based upon the higher of the 

criticized and classified items ratio 

score or the underperforming assets 

ratio score.19 Table 6 shows each of the 

measures, gives the cutoff values for 

each measure and shows the weight 

assigned to the measure to derive a 

score for an institution’s ability to 

withstand asset-related stress. Most of 

the minimum and maximum cutoff 

values for each risk measure equal the 

10th and 90th percentile values of the 

particular measure among large 

institutions based upon data from the 

period between the first quarter of 2000 

and the fourth quarter of 2009.20 21


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23521 

22That is, the statistical analysis shows that a 

significant amount of criticized and classified items 

or underperforming assets, or concentrations in 

high risk portfolios are the most significant (having 

coefficients with the largest absolute value) 

measures that help differentiate the risk profiles of 

large institutions and predict an institution’s longterm performance. In addition, recent experience 

suggests that a small number of institutions with 

very high levels of criticized and classified items or 

underperforming assets, or high risk portfolio 

concentrations are particularly vulnerable to 

unexpected asset-related stress. The value that 

triggers the outlier add-on for the criticized and 

classified items to Tier 1 capital and reserves was 

determined using FDIC’s judgment. The value that 

triggers the outlier add-on for the underperforming 

assets to Tier 1 capital and reserves is the 95th 

percentile value for the distribution of values of that 

measure for large institutions from 2000 to 2009. 

The value that triggers the outlier add-on for the 

higher risk concentration measure is the 90th 

percentile value for the distribution of values of that 

measure for large institutions from second quarter 

2008 to fourth quarter 2009. A lower value was 

chosen for this measure due to a short history of 

available data. 

TABLE 6—CUTOFF VALUES AND WEIGHTS FOR ABILITY TO WITHSTAND ASSET-RELATED STRESS MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Tier 1 Common Capital Ratio ...................................................................................................... 5.8 12.9 15 

Concentration Measure ............................................................................................................... ........................ ........................ 35 

Higher Risk Concentrations; or ............................................................................................ 0.0 3.2 ........................

Growth-Adjusted Portfolio Concentrations ........................................................................... 7.6 154.7 ........................

Core Earnings/Average Total Assets .......................................................................................... 0.0 2.3 15 

Credit Quality Measure ................................................................................................................ ........................ ........................ 35 

Criticized and Classified Items/Tier 1 Capital and Reserves; or ......................................... 6.5 100.0 ........................

Underperforming Assets/Tier 1 Capital and Reserves ........................................................ 2.3 35.1 ........................

Each score would be multiplied by a 

respective weight and the resulting 

weighted score for each measure would 

be summed to arrive at an ability to 

withstand asset-related stress score, 

which could range from 0 to 100. The 

FDIC recognizes that extreme values for 

some measures should have an 

additional effect on the final scorecard 

total. For extreme values of certain 

measures reflecting particularly high 

risk, this score could increase through 

an outlier add-on. Specifically, if an 

institution’s ratio of criticized and 

classified items to Tier 1 capital and 

reserves exceeded 100 percent or its 

ratio of underperforming assets to Tier 

1 capital and reserves exceeded 50.2 

percent, the ability to withstand assetrelated stress component score would be 

increased by 30 points. Additionally, if 

the higher risk concentration measure 

exceeded 4.8, the ability to withstand 

asset-related stress component score 

would be increased by 30 points. These 

increases (outlier add-ons) would be 

determined separately and could 

increase the ability to withstand assetrelated stress score by up to 60 points; 

thus, the ability to withstand assetrelated stress component score could be 

as high as 160 points.22

Table 7 illustrates how the ability to 

withstand asset-related stress score 

would be calculated for a hypothetical 

bank, Bank A. 

TABLE 7—ABILITY TO WITHSTAND ASSET-RELATED STRESS COMPONENT FOR BANK A 

Scorecard measures Value Score Weight 

(percent) 

Weighted 

score 

Tier 1 Common Capital Ratio .......................................................................... 7.62 74.37 15 11.15 

Concentration Measure ................................................................................... ........................ 78.13 35 27.35 

Higher Risk Concentrations; or ................................................................ 2.50 78.13 ........................ ........................

Growth-Adjusted Portfolio Concentrations ............................................... 45.00 25.42 ........................ ........................

Core Earnings/Average Total Assets .............................................................. 0.50 78.26 15 11.74 

Credit Quality Measure .................................................................................... ........................ 100.00 35 35.00 

Criticized and Classified Items/Tier 1 Capital and Reserves; or ............. 104.32 100.00 ........................ ........................

Underperforming Assets/Tier 1 Capital and Reserves ............................. 33.76 95.91 ........................ ........................

Subtotal ............................................................................................. ........................ ........................ ........................ 85.24 

Outlier Add-ons: 

Criticized and Classified Items/Tier 1 Capital and Reserves; or ............. 104.32 ........................ ........................ 30.00 

Underperforming Assets/Tier 1 Capital and Reserves ............................. 33.76 30.00 ........................ ........................

Higher Risk Concentrations ............................................................................. 2.50 0.00 ........................ ........................

Total ability to withstand asset-related stress score ............................................................................................................. 115.24 

Bank A’s higher risk concentrations 

score (78.13) is higher than its growthadjusted portfolio concentration score 

(25.42). Thus, the higher risk 

concentration score is multiplied by the 

35 percent weight to get a weighted 

score of 27.35 and the growth-adjusted 

portfolio concentration score would be 

ignored. Similarly, Bank A’s criticized 

and classified items to Tier 1 capital and 

reserves ratio score (100) is higher than 

its underperforming assets to Tier 1 

capital and reserves ratio score (95.91). 

Therefore, the criticized and classified 

items to Tier 1 capital and reserves ratio 

score would be multiplied by the 35 

percent weight to get a weighted score 

of 35.00 and the underperforming assets 

to Tier 1 capital and reserves ratio score 

would be ignored. These weighted 

scores, along with the weighted scores 

for the Tier 1 common capital ratio 

(11.15) and core earnings to average 

total assets ratio (11.74), would be 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23522 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

23 12 CFR 327.9(d)(4) (2009). 

added together, resulting in the subtotal 

of 85.24. Because Bank A’s criticized 

and classified items to Tier 1 capital and 

reserves ratio score is greater than 100, 

the criticized and classified items to 

Tier 1 capital and reserves ratio outlier 

add-on would be triggered, and an 

additional 30 points would be added to 

Bank A’s score. Bank A’s higher risk 

concentrations measure score does not 

exceed 4.8; therefore, the second outlier 

add-on would not be triggered. Thus, 

only the outlier add-on for the criticized 

and classified items to Tier 1 capital and 

reserves ratio would be added to the 

subtotal to arrive at the asset 

vulnerability component score of 115.24 

for Bank A. 

c. Ability To Withstand FundingRelated Stress 

The ability to withstand fundingrelated stress component would contain 

three measures that are most relevant to 

assessing a large institution’s ability to 

withstand such stress—a core deposits 

to total liabilities ratio, an unfunded 

commitments to total assets ratio, and a 

liquid assets to short-term liabilities 

(liquidity coverage) ratio. These ratios 

are significant in predicting a large 

institution’s long-term performance in 

the statistical test described in 

Appendix 1. Appendix B describes 

these ratios in detail and gives the 

source of the data used to determine 

them. 

Each risk measure would be 

converted to a score between 0 and 100 

where 100 equals the highest risk and 0 

equals the lowest risk for that measure. 

A risk measure value reflecting lower 

risk than the cutoff value that results in 

a score of 0, will also receive a score of 

0, where 0 equals the lowest risk for that 

measure. A risk measure value reflecting 

higher risk than the cutoff value that 

results in a score of 100, will also 

receive a score of 100, where 100 equals 

the highest risk for that measure. For the 

Core Deposits/Liabilities measure and 

the Liquidity Coverage Ratio, a lower 

ratio implies higher risk and a higher 

ratio implies lower risk. For these 

measures, a value between the 

minimum and maximum cutoff values 

will be converted linearly to a score 

between 0 and 100, according to the 

following formula: 

S = (Max ¥ V)*100/(Max ¥ Min) 

Where S is score (rounded to three decimal 

points), V is the value of the measure, 

Min is the minimum cutoff value and 

Max is the maximum cutoff value. 

For the Unfunded Commitments/ 

Assets measure, a lower value 

represents lower risk and a higher value 

represents higher risk. For these 

measures, a value between the 

minimum and maximum cutoff values 

is converted linearly to a score between 

0 and 100, according to the following 

formula: 

S = (V ¥ Min)*100/(Max ¥ Min) 

Where S is score (rounded to three decimal 

points), V is the value of the measure, 

Min is the minimum cutoff value and 

Max is the maximum cutoff value. 

The ability to withstand fundingrelated stress component score would be 

the weighted average of the three 

measure scores. Table 8 shows the 

cutoff values and weights for these 

measures. 

TABLE 8—CUTOFF VALUES AND WEIGHTS FOR ABILITY TO WITHSTAND FUNDING-RELATED STRESS MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Core Deposits/Total Liabilities ..................................................................................................... 3.2 79.1 40 

Unfunded Commitments/Total Assets ......................................................................................... 0.3 42.2 40 

Liquid Assets/Short-term Liabilities (liquidity coverage ratio) ...................................................... 5.6 170.9 20 

d. Calculation of Performance Score 

The weighted average CAMELS score, 

the ability to withstand asset-related 

stress score, and the ability to withstand 

funding-related stress score would then 

be multiplied by their weights and the 

results would be summed to arrive at 

the performance score. This score would 

not be less than 0 or more than 100 

under the proposal. In the example in 

Table 9, Bank A’s performance score 

would be 81.70. 

TABLE 9—PERFORMANCE SCORE FOR BANK A 

Performance score components Weight 

(percent) Score Weighted score 

Weighted Average CAMELS Score ............................................................................................................... 30 65.15 19.54 

Ability to Withstand Asset-Related Stress Score .......................................................................................... 50 115.24 57.62 

Ability to Withstand Funding-Related Stress Score ...................................................................................... 20 22.69 4.54 

Total Performance Score ....................................................................................................................... .................. .................. 81.70 

The performance score could be 

adjusted, up or down, by a maximum of 

15 points, based upon significant risk 

factors that are not adequately captured 

in the scorecard. The resulting score, 

however, could not be less than 0 or 

more than 100. The FDIC would use a 

process similar to the current large bank 

adjustment to determine the amount of 

the adjustment to the performance 

score.23 This discretionary adjustment is 

discussed in more detail below. 

2. Loss Severity Score 

The loss severity score would 

measure the relative magnitude of 

potential losses to the FDIC in the event 

of an institution’s failure. The loss 

severity score would be based on two 

measures that are most relevant to 

assessing an institution’s potential loss 

severity. The loss severity measure is 

the ratio of possible losses to the FDIC 

in the event of an institution’s failure to 

total domestic deposits, averaged over 

three quarters. A standardized set of 

assumptions—based on recent failures— 

regarding liability runoffs and the 

recovery value of asset categories are 

applied to calculate possible losses to 

the FDIC. (Appendix D to the NPR 

describes the calculation of the measure 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23523 

24 12 CFR 327.9(d)(4) (2009). 

25The score of 30 and 90 equals about the 20th 

and about the 97th percentile values, respectively, 

based on scorecard results as of first quarter 2005 

through fourth quarter 2006. 

26The rate of increase in the initial base 

assessment rate is based on a statistical analysis of 

failure probabilities as described in Appendix 2. 

in detail.) A loss severity measure is 

used as part of the current large bank 

adjustment. The second measure is the 

ratio of secured liabilities to total 

domestic deposits. (The greater an 

institution’s secured liabilities relative 

to domestic deposits, the greater the 

FDIC’s potential rate of loss in the event 

of failure, since secured liabilities have 

priority in payment over deposits at 

failure.) These measures are quantitative 

measures that are derived from readily 

available data. Appendix B defines 

these measures and gives the source of 

the data used to calculate them. 

Each risk measure would be 

converted to a score between 0 and 100 

where 100 equals the highest risk and 0 

equals the lowest risk for that measure. 

A risk measure value reflecting lower 

risk than the minimum cutoff value 

results in a score of 0, where 0 equals 

the lowest risk for that measure. A risk 

measure value reflecting higher risk 

than the maximum cutoff value results 

in a score of 100, where 100 equals the 

highest risk for that measure. A risk 

measure value between the minimum 

and maximum cutoff values is 

converted linearly to a score between 0 

and 100, according to the following 

formula: 

S = (V ¥ Min)*100/(Max ¥ Min), 

Where S is score (rounded to three decimal 

points), V is the value of the measure, Min 

is the minimum cutoff value and Max is the 

maximum cutoff value. 

The loss severity score would be the 

weighted average of these scores. Table 

10 shows cutoff values and weights for 

these measures. The loss severity score 

would not be less than 0 or more than 

100 under the proposal. 

TABLE 10—CUTOFF VALUES AND WEIGHTS FOR LOSS SEVERITY SCORE MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Potential Losses/Total Domestic Deposits (Loss Severity Measure) ......................................... 0.0 30.1 50 

Secured Liabilities/Total Domestic Deposits ............................................................................... 0.0 75.7 50 

In the example in Table 11, Bank A’s 

loss severity score would be 36.04. 

TABLE 11—LOSS SEVERITY SCORE FOR BANK A 

Scorecard measures Ratio Score Weight 

(percent) 

Weighted 

score 

Potential Losses/Total Domestic Deposits (Loss severity measure) .............. 15.20 50.50 50 25.25 

Secured Liabilities/Total Domestic Deposits ................................................... 16.34 21.59 50 10.79 

Total Loss Severity Score ........................................................................ ........................ ........................ ........................ 36.04 

Similar to the performance score, the 

loss severity score could be adjusted, up 

or down, by a maximum of 15 points, 

based on significant risk factors specific 

to the institution that are not adequately 

captured in the scorecard. The resulting 

score, however, could not be less than 

0 or more than 100. The FDIC would use 

a process similar to the current large 

bank adjustment to determine the 

amount of the adjustment to the loss 

severity score.24 This discretionary 

adjustment is discussed in more detail 

below. 

3. Initial Base Assessment Rate 

Under the proposal, once the 

performance and loss severity scores are 

calculated, and potentially adjusted, 

these scores would be converted to an 

initial base assessment rate using the 

following method: 

First, the loss severity score would be 

converted into a loss severity measure 

that ranges from 0.8 (score of 5 or lower) 

to 1.2 (score of 85 or higher). Scores that 

fall at or below the minimum cutoff of 

5 would receive a loss severity measure 

of 0.8 and scores that fall at or above the 

maximum cutoff of 85 would receive a 

loss severity score of 1.2. Again, a linear 

interpolation would be used to convert 

loss severity scores between the cutoffs 

into a loss severity measure. The 

conversion would be made using the 

following formula: 

Loss Severity Measure = 0.8 + [(Loss 

Severity Score ¥ 5) × 0.005] 

For example, if Bank A’s loss severity 

score is 36.04, its loss severity measure 

would be 0.96, calculated as follows: 

0.8 + [(36.04 ¥ 5) * 0.005] = 0.96. 

Next, the performance score would be 

multiplied by the loss severity measure 

to produce a total score (total score = 

performance score * loss severity 

measure). Since the loss severity 

measure ranges from 0.8 to 1.2, the total 

score could be up to 20 percent higher 

or lower than the performance score. 

The total score would be capped at 100 

under the proposal and would be 

rounded to two decimal places. For 

example, if Bank A’s performance score 

is 81.70 and its loss severity measure is 

0.96, its total score would be 78.43, 

calculated as follows: 

81.70 * 0.96 = 78.43 

A large institution with a total score 

of 30 or lower would pay the minimum 

initial base assessment rate and an 

institution with a total score of 90 or 

greater would pay the maximum initial 

base assessment rate.25 For total scores 

between 30 and 90, initial base 

assessment rates would rise at an 

increasing rate as the total score 

increased. The initial base assessment 

rate (in basis points) would be 

calculated according to the following 

formula (assuming that the maximum 

initial base assessment rate was 40 basis 

points higher than the minimum rate): 26


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23524 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

27The initial base assessment rate would be 

rounded to two decimal points. 

28A parent company would be defined as a bank 

holding company under the Bank Holding 

Company Act of 1956 or a savings and loan holding 

company under the Home Owners’ Loan Act. A 

credit card bank would be defined as a bank for 

which credit card plus securitized receivables 

exceed 50 percent of assets plus securitized 

receivables. A processing bank and trust company 

would be defined as an institution whose last 3 

years’ non-lending interest income plus fiduciary 

revenues plus investment banking fees exceed 50 

percent of total revenues (and last 3 years’ fiduciary 

revenues are non-zero). 

Rate Score= −+ ×⎛

⎝

⎜ ⎞

⎠

⎟

⎛

⎝

⎜

⎜

⎞

⎠

Minimum Rate 0 165289 68 02027 ⎟ 100

5

. . ⎟

For example, if Bank A’s total score 

were 78.43, and the minimum and 

maximum initial base assessment rates 

were 10 basis points and 50 basis 

points, respectively, its initial base 

assessment rate would be 30.02 basis 

points, calculated as follows: 

( . 10 30 02

5

 bps 0.165289) 68.02027 78.43

100

−+× b ⎛

⎝

⎜ ⎞

⎠

⎟

⎛

⎝

⎜

⎜

⎞

⎠

⎟

⎟ = asis points27

This calculation of an initial 

assessment rate is based on an 

approximated statistical relationship 

between an institution’s total score and 

its estimated three-year cumulative 

failure probability. 

Chart 2 illustrates the initial base 

assessment rate based on a range of total 

scores and Bank A’s assessment rate is 

indicated on the curve. 

The initial base assessment rate could 

be adjusted as a result of the unsecured 

debt adjustment, secured liability 

adjustment and brokered deposit 

adjustment (discussed below). 

B. Scorecard for Highly Complex 

Institutions 

As mentioned above, those 

institutions that are structurally and 

operationally complex or that pose 

unique challenges and risks in case of 

failure (highly complex institutions) 

would have a different scorecard under 

the proposal. A ‘‘highly complex 

institution’’ would be defined as: (1) An 

insured depository institution 

(excluding a credit card bank) with 

greater than $50 billion in total assets 

that is wholly owned by a parent 

company with more than $500 billion in 

total assets, or wholly owned by one or 

more intermediate parent companies 

that are wholly owned by a holding 

company with more than $500 billion in 

assets, or (2) a processing bank and trust 

company with greater than $10 billion 

in total assets, provided that the 

information required to calculate 

assessment rates as a highly complex 

institution is readily available to the 

FDIC.28 Under the proposal, highly 

complex institutions would have a 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.006</MATH> EP03MY10.007</MATH> EP03MY10.008</GPH>
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23525 

scorecard with measures tailored to the 

risks posed by these institutions, but the 

methodology involved would be the 

same for both scorecards. 

The scorecard for highly complex 

institutions has four additional 

measures that do not appear in the 

scorecard for other large institutions 

(the senior bond spread, the institution’s 

parent company’s tangible common 

equity (TCE) ratio, the 10-day 99 percent 

Value at Risk (VaR), and the short-term 

funding to total assets ratio). These 

measures were designed to measure 

vulnerability to changes in the market 

and would be incorporated into the 

calculation of a highly complex 

institution’s initial base assessment rate 

because of the institution’s greater 

involvement in market activities. 

Appendix B describes these measures in 

detail and gives the source of the data 

used to calculate the measures. 

The scorecard for highly complex 

institutions, like the scorecard for other 

large institutions, would contain a 

performance component and a loss 

severity component. However, the 

performance score for highly complex 

institutions would contain an additional 

component—the market indicators 

component. Table 12 shows the 

scorecard measures and the possible 

range of scores that would be used for 

these institutions. Table 13 gives the 

weights associated with the four 

components of the performance 

scorecard for highly complex 

institutions. 

TABLE 12—SCORECARD FOR HIGHLY COMPLEX INSTITUTIONS

Components Scorecard measures Score 

CAMELS ..................................................... Weighted Average CAMELS .......................................................................................... 25–100 

Market Indicator ......................................... Senior Bond Spread ....................................................................................................... 0–100 

Outlier Add-ons 

Parent Company Tangible Common Equity (TCE) Ratio ............................................... 30 

Total Market Indicator score ........................................................................................... 0–130 

Ability to Withstand Asset-Related Stress Tier 1 Common Capital Ratio (Tier 1 Common Capital/Total Average Assets less 

Disallowed Intangibles).

0–100 

Concentration Measure ................................................................................................... 0–100 

Higher Risk Concentrations; or 

Growth-Adjusted Portfolio Concentrations 

Core Earnings/Average Total Assets ............................................................................. 0–100 

Credit Quality Measure ................................................................................................... 0–100 

Criticized and Classified Items/Tier 1 Capital and Reserves Underperforming Assets/Tier 1 Capital and Reserves 

10-day 99% VaR/Tier 1 Capital ...................................................................................... 0–100 

Subtotal ........................................................................................................................... 0–100 

Outlier Add-ons 

Criticized and Classified Items/Tier 1 Capital and Reserves; or 30 

Underperforming Assets/Tier 1 Capital and Reserves 

Higher Risk Concentrations Measure ............................................................................. 30 

Total ability to withstand asset-related stress score ...................................................... 0–160 

Ability to Withstand Funding-Related 

Stress.

Core Deposits/Total Liabilities ........................................................................................ 0–100 

Unfunded Commitments/Total Assets ............................................................................ 0–100 

Liquid Assets/Short-term Liabilities (liquidity coverage ratio) ......................................... 0–100 

Short-term Funding/Total Assets .................................................................................... 0–100 

Subtotal ........................................................................................................................... 0–100 

Outlier Add-ons 

Short-term funding/Total Assets ..................................................................................... 30 

Total ability to withstand funding-related stress score ................................................... 0–130 

Total Performance Score ................................................................................................ 0–100 

Potential Loss Severity .............................. Potential Losses/Total Domestic Deposits (loss severity measure) .............................. 0–100 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23526 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

29Historical analysis shows that a significant 

amount of short-term funding can increase the risk 

profile of an institution. External funding sources 

TABLE 12—SCORECARD FOR HIGHLY COMPLEX INSTITUTIONS—Continued 

Components Scorecard measures Score 

Secured Liabilities/Total Domestic Deposits .................................................................. 0–100 

Total loss severity score ................................................................................................. 0–100 

TABLE 13—PERFORMANCE SCORE

COMPONENTS AND WEIGHTS

Performance score components Weight 

(percent) 

CAMELS Rating ....................... 20 

Market Indicators ...................... 10 

Ability to Withstand Asset-Related Stress ........................... 50 

Ability to Withstand FundingRelated Stress ...................... 20 

The additional component, the market 

indicator component, would be added 

to the performance scorecard for highly 

complex institutions. The market 

indicator component contains only one 

measure, the senior bond spread score, 

and one outlier add-on. The FDIC would 

use the senior bond spread because this 

measure can be compared consistently 

across institutions. The senior bond 

spread would be converted linearly to a 

score between 0 and 100. The minimum 

and maximum cutoff values for the 

market indicator measure are shown in 

Table 14. The market indicator 

component score would be adjusted by 

up to 30 points if the institution’s parent 

company’s tangible common equity 

(TCE) ratio fell below 4 percent since 

the market generally perceives a parent 

company to be vulnerable if its TCE is 

less than 4 percent. Including the outlier 

add-on, the market indicator component 

score could be as high as 130 points. 

TABLE 14—CUTOFF VALUES AND WEIGHT FOR MARKET INDICATOR MEASURE

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Senior Bond Spread ........................................................................................................................................ 0.6 3.8 100 

The scorecard for highly complex 

institutions adds one additional factor 

to the ability to withstand asset-related 

stress component—the 10-day 99 

percent Value at Risk (VaR)/Tier 1 

capital—and one additional factor to the 

ability to withstand funding-related 

stress component—the short-term 

funding to total assets ratio. Table 15 

and Table 16 show cutoff values and 

weights for ability to withstand assetrelated stress measures and ability to 

withstand funding-related stress 

measures, respectively. 

TABLE 15—CUTOFF VALUES AND WEIGHTS FOR ABILITY TO WITHSTAND ASSET-RELATED STRESS MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Tier 1 Common Capital Ratio ...................................................................................................... 5.8 12.9 10 

Concentration Measure: 35 

Higher Risk Concentrations; or ............................................................................................ 0.0 3.2 

Growth-Adjusted Portfolio Concentrations ........................................................................... 7.6 154.7 

Core Earnings/Average Total Assets .......................................................................................... 0.0 2.3 10 

Credit Quality Measure: 35 

Criticized and Classified Items to Tier 1 Capital and Reserves; or ..................................... 6.5 100.0 

Underperforming Assets/Tier 1 Capital and Reserves ........................................................ 2.3 35.1 

10-day 99 VaR/Tier 1 Capital ...................................................................................................... 0.1 0.5 10 

TABLE 16—CUTOFF VALUES AND WEIGHTS FOR ABILITY TO WITHSTAND FUNDING-RELATED STRESS MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Core Deposits/Total Liabilities ..................................................................................................... 3.2 79.1 30 

Unfunded Commitments/Total Assets ......................................................................................... 0.3 42.2 30 

Liquid Assets/Short-term Liabilities (liquidity coverage ratio) ...................................................... 5.6 170.9 20 

Short-term Funding/Total Assets ................................................................................................. 0.0 19.1 20 

The scorecard for highly complex 

institutions also adds an additional 

outlier add-on. The ability to withstand 

funding-related stress component score 

for highly complex institutions would 

be adjusted by 30 points if the ratio of 

short-term funding to total assets 

exceeded 26.9 percent.29 The use of 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23527 

can be a critical source of liquidity but short-term 

funding exposes an institution to near-term price 

risk and rollover risk. These risks increase for an 

institution during periods of market disruption or 

when the institution itself is experiencing financial 

distress. The add-on is triggered when the level of 

short-term funding to total assets ratio exceeds 

26.9%. This is the 95th percentile of this measure 

among large institutions based upon data from the 

period between the third quarter of 1999 and the 

second quarter of 2009. 

30 12 CFR 327.9(d)(4)(2009). 31 12 CFR 327.9(d)(4) (2009). 32 72 FR 27122 (May 14, 2007). 

short-term funding has proved to be 

highly unstable and the FDIC has found 

an increased vulnerability, particularly 

for institutions that are active 

participants, when there is a heavy 

reliance on this type of funding. 

Including the outlier add-on, the ability 

to withstand funding-related stress 

component score for highly complex 

institutions could be as high as 130 

points. 

To calculate the performance score for 

highly complex institutions, the 

weighted average CAMELS score, the 

market indicators score, the ability to 

withstand asset-related stress score, and 

the ability to withstand funding-related 

stress score would be multiplied by 

their weights and the results would be 

summed to arrive at the performance 

score. The score would be capped at 100 

under the proposal. The loss severity 

score for highly complex institutions 

would be calculated the same way as 

the loss severity score for other large 

institutions. 

As is the case for other large 

institutions, the performance score and 

the loss severity score for highly 

complex institutions could be adjusted, 

up or down, by maximum of 15 points 

each, based upon significant risk factors 

that are not adequately captured in the 

scorecard. The resulting scores, 

however, could not be less than 0 or 

more than 100. The FDIC would use a 

process similar to the current large bank 

adjustment to determine the amount of 

any adjustments.30 This discretionary 

adjustment is discussed in more detail 

below. 

The initial base assessment rate for 

highly complex institutions would be 

calculated from the total score in the 

same manner as for other large 

institutions as described above. As in 

the case of other large institutions, the 

initial base assessment rate could also 

be adjusted as a result of the unsecured 

debt adjustment, the secured liability 

adjustment, and the brokered deposit 

adjustment (discussed below). 

C. Large Bank Adjustment to the 

Performance Score and Loss Severity 

Score 

Under current rules, large institutions 

and insured branches of foreign banks 

within Category 1 are subject to an 

assessment rate adjustment (the large 

bank adjustment). The large bank 

adjustment was designed to preserve 

consistency in the relative risk rankings 

of large institutions as indicated by 

assessment rates, to ensure fairness 

among all large institutions, and to 

ensure that assessment rates take into 

account all available information that is 

relevant to the FDIC’s risk-based 

assessment decision. The FDIC proposes 

that a large bank adjustment be retained 

that would be imposed in the same 

manner (and subject to the same notice 

requirements) as under the current 

rule.31

As proposed, the FDIC could adjust 

the performance score and/or the loss 

severity score for all large institutions 

and highly complex institutions, up or 

down, by a maximum of 15 points each, 

based upon significant risk factors that 

are not adequately captured in the 

scorecard. In determining whether to 

make a large bank adjustment, the FDIC 

may consider such information as 

financial performance and condition 

information and other market or 

supervisory information. The FDIC 

would also consult with an institution’s 

primary Federal regulator and, for state 

chartered institutions, state banking 

supervisor. Appendix E lists some, but 

not all, criteria that could be considered 

in determining whether or not a 

discretionary adjustment is necessary. 

In general, the proposed adjustments 

to the performance and loss severity 

scores would have a proportionally 

greater effect on the assessment rate of 

those institutions with a higher total 

score. The effect of an upward 

adjustment to a score on the 

institution’s assessment rate would be 

calculated as 

A P+C

100

P u = × ⎛

⎝

⎜ ⎞

⎠

⎟ − ⎛

⎝

⎜ ⎞

⎠

⎟

⎡

⎣

⎢

⎢

⎤

⎦

⎥

⎥

68 02027

100

5 5

.

and the effect of a downward 

adjustment to a score on the 

institution’s assessment rate would be 

A P PC

100 d = × ⎛

⎝

⎜ ⎞

⎠

⎟ − ⎛ −

⎝

⎜ ⎞

⎠

⎟

⎡

⎣

⎢

⎢

⎤

⎦

⎥

⎥

68 02027

100

5 5

. ,

where Au is an increase in the assessment 

rate, Ad is a decrease in the assessment rate, 

C is the amount of upward adjustment to 

score, and P is pre-adjustment score. 

Notifications involving an upward 

adjustment to an institution’s 

assessment rate would be made in 

advance of implementing such an 

adjustment so that the institution has an 

opportunity to respond to or address the 

FDIC’s rationale for proposing an 

upward adjustment. Adjustments would 

be implemented after considering the 

institution’s response to this notification 

along with any subsequent changes 

either to the inputs or other risk factors 

that relate to the FDIC’s decision. 

The FDIC acknowledges the need to 

clarify and make technical changes to its 

adjustment guidelines for large 

institutions to ensure consistency with 

this rulemaking.32

D. Liability-Based Adjustments 

The proposed rule would continue to 

allow for adjustments to an institution’s 

initial base assessment rate as a result of 

certain long-term unsecured debt, 

secured liabilities and brokered 

deposits. These adjustments are 

currently provided for in the 2009 

assessments rule, except that the 

brokered deposit adjustment currently 

applies only to institutions in Risk 

Categories II, III and IV. The proposed 

rule would extend the brokered deposit 

adjustment to all large institutions since 

the adjusted brokered deposit ratio 

(which took brokered deposits and 

growth into account for large Risk 

Category I institutions) would no longer 

apply. The unsecured debt adjustment, 

secured liability adjustment and 

brokered deposit adjustment would be 

applicable to both large institutions and 

highly complex institutions under the 

proposal. 

E. Calculation of Total Assessment Rate 

After making the adjustments just 

described, the resulting assessment rate 

would be the total assessment rate. 

Under the proposal, unlike the current 

rule for both large and small 

institutions, a large institution’s total 

assessment rate could not be more than 

50 percent lower than its initial base 

assessment rate. This change ensures 

that all institutions would pay 

assessments even if the minimum initial 

base assessment rate is set at 5 basis 

points or less. 

F. Updating Scorecard 

The FDIC proposes that it have the 

flexibility to update the minimum and 

maximum cutoff values and weights 

used in each scorecard annually, 

without notice-and-comment 

rulemaking. In particular, the FDIC 

could add new data from each year to 

its analysis and could, from time to 

time, exclude some earlier years from its 

analysis. Updating the minimum and 

maximum cutoff values and weights 

would allow the FDIC to use the most 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.009</MATH> EP03MY10.010</MATH>
23528 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

33Reports of condition include Reports of Income 

and Condition and Thrift Financial Reports. 

34Pursuant to existing supervisory practice, the 

FDIC does not assign a different component rating 

from that assigned by an institution’s primary 

federal regulator, even if the FDIC disagrees with a 

CAMELS component assigned by an institution’s 

primary federal regulator, unless: (1) The 

disagreement over the component rating also 

involves a disagreement over a CAMELS composite 

rating; and (2) the disagreement over the CAMELS 

composite rating is not a disagreement over whether 

the CAMELS composite rating should be a 1 or a 

2. The FDIC has no plans to alter this practice. 

35 12 U.S.C. 1817(b)(2)(D) provides that ‘‘No 

insured depository institution shall be barred from 

the lowest risk category solely because of size.’’ 

36 74 FR 51062 (Oct. 2, 2009). Under current 

rules, the FDIC has discretion to increase or 

decrease assessment rates in effect up to 3 basis 

points above or below total base assessment rates 

without the need for additional rulemaking. The 

proposed rule would not affect this provision. 

37For the purpose of this analysis, large 

institutions are those with total assets of $10 billion 

or greater as of December 31, 2009. The estimates 

in the text regarding the effect of the proposal on 

assessment rates, the effect on industry capital and 

earnings discussed later in the text and the 

Regulatory Flexibility Act analysis discussed later 

in the text, are based in part on approximations of 

a few risk measures. 

recent data, thereby improving the 

accuracy of the scorecard method. 

On the other hand, if, as a result of its 

review and analysis, the FDIC concludes 

that additional or alternative measures 

should be used to determine risk-based 

assessments or that a new method 

should be used to differentiate risk 

among large institutions and highly 

complex institutions, such changes 

would be made through notice-andcomment rulemaking. 

Financial ratios for any given quarter 

would continue to be calculated from 

the report of condition filed by each 

institution or data collected through the 

FDIC’s LIDI program as of the last day 

of the quarter.33 CAMELS component 

rating changes would continue to be 

effective as of the date that the rating 

change is transmitted to the institution 

for purposes of determining assessment 

rates.34

IV. Assessment Rates 

As discussed above, the FDIC 

proposes a wider range of assessment 

rates than under the current assessment 

system. To maintain approximately the 

same total revenue under the proposed 

rule as under the current system, the 

FDIC proposes that the Board adopt new 

initial and total base assessment rate 

schedules set out in Tables 17 and 18, 

effective January 1, 2011. 

Under the proposed rule, the range of 

initial base assessment rates for small 

institutions and insured branches of 

foreign banks in Risk Category I would 

be uniformly 2 basis points lower than 

under the current assessment system; 

the initial base assessment rate for 

institutions in Risk Category II would be 

unchanged; while the proposed initial 

base assessment rate for small 

institutions and insured branches in 

Risk categories III and IV would be 

somewhat higher. For large and highly 

complex institutions the minimum rate 

in the proposed range of rates would be 

2 basis points lower than the current 

Risk Category I minimum assessment 

rate and the maximum rate in the range 

would be slightly higher than current 

maximum Risk Category IV assessment 

rates.35

Actual total assessment rates will be 

set uniformly 3 basis points higher than 

the proposed rates in accordance with 

the Amended Restoration Plan that the 

FDIC adopted on September 29, 2009.36

TABLE 17—PROPOSED INITIAL AND TOTAL BASE ASSESSMENT RATES FOR SMALL INSTITUTIONS AND INSURED BRANCHES

OF FOREIGN BANKS

Risk category I Risk category II Risk category III Risk category IV 

Initial base assessment rate ............................................................ 10–14 22 34 50 

Unsecured debt adjustment ............................................................. ¥5–0 ¥5–0 ¥5–0 ¥5–0 

Secured liability adjustment ............................................................. 0–7 0–11 0–17 0–25 

Brokered deposit adjustment ........................................................... ............................ 0–10 0–10 0–10 

Total Base Assessment Rate ................................................... 5–21 17–43 29–61 45–85 

All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or maximum rate will vary between 

these rates. All rates shown would increase 3 basis points on January 1, 2011, pursuant to the FDIC Amended Restoration Plan adopted on 

September 29, 2009. 74 FR 51062 (Oct. 2, 2009). 

TABLE 18—PROPOSED INITIAL AND TOTAL BASE ASSESSMENT RATES FOR LARGE INSTITUTIONS

Large institutions 

Initial base assessment rate ............................................................................................................................................................ 10–50 

Unsecured debt adjustment ............................................................................................................................................................. ¥5–0 

Secured liability adjustment ............................................................................................................................................................. 0–25 

Brokered deposit adjustment ........................................................................................................................................................... 0–10 

Total Base Assessment Rate ................................................................................................................................................... 5–85 

All amounts are in basis points annually. Total base rates that are not the minimum or maximum rate will vary between these rates. All rates 

shown would increase 3 basis points on January 1, 2011, pursuant to the FDIC Amended Restoration Plan adopted on September 29, 2009. 74 

FR 51062 (Oct. 2, 2009). 

Based upon the analysis and 

projections below, the FDIC has 

concluded that the proposed assessment 

rate structure (including the previously 

announced 3 basis point uniform 

increase in assessment rates beginning 

January 1, 2011) should satisfy the 

FDIC’s revenue and liquidity needs. 

Under the proposal, for the fourth 

quarter 2009 assessment period, total 

base assessment rates would have been 

lower for about 52 percent of large 

institutions and 76 percent of small 

institutions.37 The rates would have 

been higher for about 48 percent of large 

institutions and 9 percent of small 

institutions. The rates would have 

remained the same for 15 percent of 

small institutions. 

Fund Balance and Reserve Ratio 

Projections 

In September 2009, the FDIC 

projected that both the Fund balance 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23529 

38The proposed changes to assessment rates 

would not take effect until January 1, 2011. For two 

reasons, the analysis in the text examines the effect 

on earnings and capital had proposed rates been in 

effect on January 1, 2010. First, it is difficult to 

project 2011 institution income so far in advance. 

Second, as discussed in the text, because overall 

assessment revenue under the proposed system 

would remain approximately the same as the 

current system, the effect on earnings and capital 

is small for almost all institutions. This conclusion 

holds true for 2011, as well, because both current 

and proposed assessment rates will increase 

uniformly by three basis points beginning January 

1, 2011. (A detailed analysis of the projected effects 

of the payment of proposed assessment on the 

capital and earnings of insured institutions is 

contained in Appendix 3.) 

39 In setting assessment rates, the FDIC’s Board of 

Directors of the FDIC is authorized to set 

assessments for insured depository institutions in 

such amounts as the Board of Directors may 

determine to be necessary. 12 U.S.C. 1817(b)(2)(A). 

In so doing, the Board shall consider: (1) The 

estimated operating expenses of the DIF; (2) the 

estimated case resolution expenses and income of 

the DIF; (3) the projected effects of the payment on 

the capital and earnings of insured depository 

institutions; (4) the risk factors and other factors 

taken into account pursuant to 12 U.S.C. 1817(b) (1) 

under the risk-based assessment system, including 

the requirement under such paragraph to maintain 

a risk-based system; and (5) any other factors the 

Board of Directors may determine to be appropriate. 

12 U.S.C. 1817(b)(2)(B). As reflected in the text, in 

making its projections of the Fund balance and 

liquidity needs, and in making its recommendations 

regarding assessment rates, the Board has taken into 

account these statutory factors. 

40The FDIC may not address all of the questions 

posed in the current rulemaking, but may consider 

the information gathered in future actions. 

and the reserve ratio as of September 30, 

2009, would be negative, owing, in part, 

to an increase in provisioning for 

anticipated failures. The FDIC also 

projected the Fund balance and reserve 

ratio for each quarter over the next 

several years using the then most 

recently available information on 

expected failures and loss rates and 

statistical analyses of trends in CAMELS 

downgrades, failure rates and loss rates. 

The FDIC projected that, over the period 

2009 through 2013, the Fund could 

incur approximately $100 billion in 

failure costs; the FDIC projected that 

most of these costs would occur in 2009 

and 2010. 

Partly as a result of these projections, 

the FDIC increased risk-based 

assessment rates uniformly by 3 basis 

points effective January 1, 2011. Despite 

this increase, the FDIC projected that 

the Fund balance would become 

significantly negative in 2010 and 

would remain negative until first 

quarter 2013. According to these 

projections, the reserve ratio would 

return to the statutorily mandated 

minimum reserve ratio of 1.15 percent 

in the first quarter of 2017. 

As projected, the Fund balance and 

reserve ratio as of September 30, 2009, 

and December 31, 2009, were negative. 

(The Fund balance on December 31, 

2009 was negative $20.9 billion; the 

reserve ratio was ¥0.39 percent.) In 

February 2010, the FDIC reexamined its 

projections using the most recently 

available information on expected 

failures and loss rates, and statistical 

analyses of trends in CAMELS 

downgrades, failure rates and loss rates. 

This reexamination resulted in no 

material changes to the FDIC’s 

projections. However, these projections 

are subject to considerable uncertainty. 

Losses could be less than or exceed 

projected amounts, for example, if 

conditions affecting the national or 

regional economies, prove less or more 

severe than is currently anticipated. 

Effect on Industry Capital and Earnings 

The proposed changes involve 

increases in premiums for some 

institutions and reductions in premiums 

for other institutions. Because overall 

revenue remains almost constant, the 

effect on aggregate earnings and capital 

is small. Projections show that 

imposition of the new premiums will 

increase aggregate capital by 2 onehundredths of one percent (0.02 

percent) over one year. For 6,042 

institutions, assessment rates would 

decrease and earnings and capital 

would increase; for 771 institutions, 

assessment rates would increase and 

earnings and capital would decline. For 

institutions whose initial earnings are 

positive, the change in premiums will 

increase earnings by an average of 0.87 

percent (on an asset weighted basis). For 

institutions whose initial earnings are 

negative, the change in premiums will 

increase losses by an average of 0.85 

percent (on an asset weighted basis).38

Imposition of the proposed 

assessment rates would make a critical 

difference for two institutions, whose 

tier 1 capital ratio would fall below 2 

percent over a one-year horizon 

(assuming the proposed rule were 

adopted for 2010). No institution’s 

equity-to-capital ratio would fall below 

4 percent over a one-year horizon.39

V. Effective Date 

January 1, 2011. 

VI. Request for Comments 

The FDIC seeks comment on every 

aspect of this proposed rule. In 

particular, the FDIC seeks comment on 

the questions set out below. The FDIC 

asks that commenters include reasons 

for their positions.40 The FDIC 

specifically requests comment on the 

following: 

A. Questions for Future Rulemakings 

As mentioned above, the FDIC seeks 

input on additional measures that could 

be incorporated into the assessment 

system in future rulemakings. 

a. The FDIC would like to factor into 

the scorecard credit, liquidity, market, 

and interest rate stress tests. How 

should these stress tests be factored into 

the scorecard? What methodology and 

assumptions should be used? 

b. Underwriting is a key determinant 

of credit quality. The FDIC would like 

to develop metrics to measure 

underwriting quality. How could 

underwriting quality best be measured? 

c. A high level of counterparty risk 

can significantly increase an 

institution’s ability to withstand stress. 

How could counterparty risk best be 

measured? 

d. A high level of market risk can 

significantly increase an institution’s 

ability to withstand stress. How could 

market risk best be measured? 

e. How could liquidity risk best be 

measured? 

f. How should the exposure of 

individual banks to systemic risk be 

measured? What activities and behavior 

constitute exposure to systemic risk? 

g. How is the capability of risk 

management best assessed? 

h. Should the FDIC review the 

assessment system applicable to small 

institutions to determine whether 

improvements, including improvements 

analogous to those being proposed for 

the large institution assessment system, 

should be made to the assessment 

system used for small institutions? 

B. Questions About the Proposal 

1. Deposit Insurance Pricing System: 

(a) Should the risk categories be 

eliminated as proposed? 

(b) Should the two scorecards be 

combined? 

(c) Should highly complex 

institutions be defined as proposed? 

(d) Should the risk measures, 

particularly the components of the high 

risk concentrations measure, be defined 

as proposed? 

(e) Should the performance score and 

loss severity score be combined as 

proposed? 

(f) Should the initial base assessment 

rate be calculated as proposed? 

2. Performance Scorecard: 

(a) Are the proposed weights assigned 

to performance score components and 

measures appropriate? 

(b) Are the cut-off values for the risk 

measures and the outlier add-ons 

appropriate? 

(c) Should any other measures be 

added? Should any measures be 

removed or replaced? 

(d) For the growth-adjusted portfolio 

concentration measure, are the risk 

weights assigned to each portfolio as 

described in Appendix C appropriate? 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23530 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

41See 5 U.S.C. 603, 604 and 605. 42 5 U.S.C. 601. 

43Throughout this regulatory flexibility analysis 

(unlike the rest of the final rule), a ‘‘small 

institution’’ refers to an institution with assets of 

$175 million or less. 

44The proposed rule would not go into effect 

until January 1, 2011. Under the existing 

assessment system and under the proposed rule, 

assessment rates would increase uniformly by three 

basis points beginning on that date. Because the 

increase is uniform in both cases, the analysis in the 

text, which compares current assessment rates with 

proposed base assessment rates, should apply 

equally to 2011. 

(e) For the higher-risk concentration 

measure, should concentrations in other 

portfolios be considered? 

(f) Should purchased impaired loans 

under SOP 03–3 be excluded from the 

definition of criticized and classified 

items or underperforming assets? 

(g) Should the liquidity coverage ratio 

be computed as proposed? 

(h) Are the outlier add-ons 

appropriate measures? Is the score 

addition for add-ons appropriate? 

(i) Is the size of the discretionary 

adjustment to the performance score 

appropriate? 

3. Loss Severity Scorecard: 

(a) Are asset haircuts, runoff, and 

secured liability assumptions for the 

loss severity measure as described in 

Appendix D appropriate? 

(b) Are asset adjustments due to 

liability runoff and capital reductions as 

described in Appendix D applied 

appropriately? 

(c) Are the proposed weights assigned 

to loss severity measures appropriate? 

(d) Are cut-off values for risk 

measures and outlier add-ons 

appropriate? 

(e) Should any other measures be 

added? Should any measures be 

removed or replaced? 

(f) Is the size of the discretionary 

adjustment to the loss severity score 

appropriate? 

4. Assessment Rate Schedule: 

(a) Should the entire proposed 

assessment rate schedule be adjusted to 

make it revenue neutral overall? 

(b) Is the basis point range for 

assessments appropriate? 

5. Regulatory Matters: 

(a) What is the extent of regulatory 

burden with implementation of the 

proposed deposit insurance pricing 

system? 

(b) Are the requirements in the 

proposed regulation clearly stated? If 

not, how could the regulation be more 

clearly stated? 

(c) Does the proposed regulation 

contain language or jargon that is not 

clear? If so, which language requires 

clarification? 

VII. Regulatory Analysis and Procedure 

A. Solicitation of Comments on Use of 

Plain Language 

Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, 113 

Stat. 1338, 1471 (Nov. 12, 1999), 

requires the Federal banking agencies to 

use plain language in all proposed and 

final rules published after January 1, 

2000. The FDIC invites your comments 

on how to make this proposal easier to 

understand. For example: 

• Has the FDIC organized the material 

to suit your needs? If not, how could 

this material be better organized? 

• Are the requirements in the 

proposed regulation clearly stated? If 

not, how could the regulation be more 

clearly stated? 

• Does the proposed regulation 

contain language or jargon that is not 

clear? If so, which language requires 

clarification? 

• Would a different format (grouping 

and order of sections, use of headings, 

paragraphing) make the regulation 

easier to understand? If so, what 

changes to the format would make the 

regulation easier to understand? 

• What else could the FDIC do to 

make the regulation easier to 

understand? 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that each Federal agency either 

certify that a proposed rule would not, 

if adopted in final form, have a 

significant economic impact on a 

substantial number of small entities or 

prepare an initial regulatory flexibility 

analysis of the rule and publish the 

analysis for comment.41 Certain types of 

rules, such as rules of particular 

applicability relating to rates or 

corporate or financial structures, or 

practices relating to such rates or 

structures, are expressly excluded from 

the definition of ‘‘rule’’ for purposes of 

the RFA.42 The proposed rule relates 

directly to the rates imposed on insured 

depository institutions for deposit 

insurance, and to the risk-based 

assessment system components that 

measure risk and weigh that risk in 

determining each institution’s 

assessment rate, and includes technical 

and other changes to the FDIC’s 

assessment regulations. Nonetheless, the 

FDIC is voluntarily undertaking an 

initial regulatory flexibility analysis of 

the proposed rule for publication. 

As of December 31, 2009, of the 8,012 

insured commercial banks and savings 

associations, there were 4,427 small 

insured depository institutions as that 

term is defined for purposes of the RFA 

(i.e., those with $175 million or less in 

assets). 

For purposes of this analysis, whether 

the FDIC were to collect needed 

assessments under the existing rule or 

under the proposed rule, the total 

amount of assessments collected would 

be the same. The FDIC’s total 

assessment needs are driven by 

statutory requirements and by the 

FDIC’s aggregate insurance losses, 

expenses, investment income, and 

insured deposit growth, among other 

factors. Given the FDIC’s total 

assessment needs, the proposed rule 

would merely alter the distribution of 

assessments among insured institutions. 

Using data as of December 31, 2009, the 

FDIC calculated the total assessments 

that would be collected under the base 

rate schedule in the proposed rule. 

The economic impact of the final rule 

on each small institution for RFA 

purposes (i.e., institutions with assets of 

$175 million or less) was then 

calculated as the difference in basis 

points and annual assessments under 

the proposed rule compared to the 

existing rule, assuming the same total 

assessments collected by the FDIC from 

the banking industry.43 44

Based on the December 2009 data, 

under the proposed rule, the change in 

the assessment system would result in 

lower assessments for the majority of 

small institutions. Small institutions 

would experience an average drop of 

1.39 basis points in their assessment 

rates under the proposed rule. More 

than 86 percent of these institutions 

would face a lower assessment rate, 

with 76 percent of them being charged 

1 to 2 basis points lower than the 

current pricing rule. Of the total 4,427 

small institutions, only 13 percent 

would experience an increase and only 

173 institutions would experience an 

assessment rate increase of more than 2 

basis points. These figures indicate that 

the proposed rule will have a positive 

economic impact for a substantial 

number of small insured institutions. 

Table 19 below sets forth the results of 

the analysis in more detail. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23531 

45 5 U.S.C. 605. 

TABLE 19—CHANGE IN BASIS POINT ASSESSMENTS UNDER THE PROPOSED RULE

Change in basis point assessments Number of 

institutions 

Percent of 

institutions 

More than ¥2 basis points lower .................................................................................................................... 114 2.58 

¥2 to ¥1 basis points lower .......................................................................................................................... 3,377 76.28 

¥1 to 0 basis points lower .............................................................................................................................. 356 8.04 

0 to 1 basis points higher ................................................................................................................................ 243 5.49 

1 to 2 basis points higher ................................................................................................................................ 164 3.70 

More than 2 basis points higher ...................................................................................................................... 173 3.91 

Total .......................................................................................................................................................... 4,427 100.00 

The FDIC performed a similar 

analysis to determine the impact on 

profits for small institutions. Based on 

December 2009 data, under the final 

rule, 96 percent of the 3,039 small 

institutions with reported profits would 

experience a positive change in their 

annual profits. Table 20 sets forth the 

results of the analysis in more detail. 

TABLE 20—CHANGE IN ASSESSMENTS UNDER THE PROPOSAL AS A PERCENTAGE OF PROFIT * 

Change in assessments as a percentage of profit Number of 

institutions 

Percent of 

institutions 

More than .2 percent lower ............................................................................................................................. 18 0.59 

.1 to .2 percent lower ....................................................................................................................................... 18 0.59 

.05 to .1 percent lower ..................................................................................................................................... 41 1.35 

0 to .05 percent lower ...................................................................................................................................... 2,841 93.48 

0 to 1 percent higher ....................................................................................................................................... 121 3.98 

Total .......................................................................................................................................................... 3,039 100.00 

* Institutions with negative or no profit were excluded. These institutions are shown separately in the next table. 

Of those small institutions with 

reported profits, less than 4 percent 

would have experienced a decrease in 

their profits under the proposed rule. 

More than 96 percent of these small 

institutions would have an increase in 

their profits. Again, these figures 

indicate a positive economic impact on 

profits for the majority of small insured 

institutions. 

Table 21 excludes small institutions 

that either show no profit or show a 

loss, because a percentage cannot be 

calculated. The FDIC analyzed the effect 

of the proposed rule on these 

institutions by determining the annual 

assessment change that would result. 

Table 21 below shows that only 2.81 

percent (39) of the 1,388 small insured 

institutions in this category would 

experience an increase in annual 

assessments of $10,000 or more. More 

than 10 percent of these institutions 

would experience a decrease of $5,000 

or more. 

TABLE 21—CHANGE IN ASSESSMENTS UNDER THE PROPOSED RULE FOR INSTITUTIONS WITH NEGATIVE OR NO

REPORTED PROFIT

Change in assessments Number of 

institutions 

Percent of 

institutions 

$5,000–$10,000 decrease ............................................................................................................................... 147 10.59 

$1,000–$5,000 decrease ................................................................................................................................. 468 33.72 

$0–$1,000 decrease ........................................................................................................................................ 334 24.06 

$0–$1,000 increase ......................................................................................................................................... 151 10.88 

$1,000–$10,000 increase ................................................................................................................................ 249 17.94 

$10,000 increase or more ............................................................................................................................... 39 2.81 

Total .......................................................................................................................................................... 1,388 100.00 

The proposed rule does not directly 

impose any ‘‘reporting’’ or 

‘‘recordkeeping’’ requirements within 

the meaning of the Paperwork 

Reduction Act. The compliance 

requirements for the proposed rule 

would not exceed existing compliance 

requirements for the present system of 

FDIC deposit insurance assessments, 

which, in any event, are governed by 

separate regulations. 

The FDIC is unaware of any 

duplicative, overlapping or conflicting 

Federal rules. 

The initial regulatory flexibility 

analysis set forth above demonstrates 

that the proposed rule would not have 

a significant economic impact on a 

substantial number of small institutions 

within the meaning of those terms as 

used in the RFA.45

C. Paperwork Reduction Act 

No collections of information 

pursuant to the Paperwork Reduction 

Act (44 U.S.C. 3501 et seq.) are 

contained in the proposed rule. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23532 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

D. The Treasury and General 

Government Appropriations Act, 1999— 

Assessment of Federal Regulations and 

Policies on Families 

The FDIC has determined that the 

proposed rule will not affect family 

well-being within the meaning of 

section 654 of the Treasury and General 

Government Appropriations Act, 

enacted as part of the Omnibus 

Consolidated and Emergency 

Supplemental Appropriations Act of 

1999 (Pub. L. 105–277, 112 Stat. 2681). 

List of Subjects in 12 CFR Part 327 

Bank deposit insurance, Banks, 

Banking, Savings associations. 

For the reasons set forth in the 

preamble, the FDIC proposes to amend 

chapter III of title 12 of the Code of 

Federal Regulations as follows: 

PART 327—ASSESSMENTS 

1. The authority citation for part 327 

continues to read as follows: 

Authority: 12 U.S.C. 1441, 1813, 1815, 

1817–1819, 1821; Sec. 2101–2109, Pub. L. 

109–171, 120 Stat. 9–21, and Sec. 3, Pubic 

Law 109–173, 119 Stat. 3605. 

2. In § 327.4, revise paragraphs (c) and 

(f) to read as follows: 

§ 327.4 Assessment rates. 

* * * * * 

(c) Requests for review. An institution 

that believes any assessment risk 

assignment provided by the Corporation 

pursuant to paragraph (a) of this section 

is incorrect and seeks to change it must 

submit a written request for review of 

that risk assignment. An institution 

cannot request review through this 

process of the CAMELS ratings assigned 

by its primary Federal regulator or 

challenge the appropriateness of any 

such rating; each Federal regulator has 

established procedures for that purpose. 

An institution may also request review 

of a determination by the FDIC to assess 

the institution as a large or a small 

institution (12 CFR 327.9(d)(9)) or a 

determination by the FDIC that the 

institution is a new institution (12 CFR 

327.9(d)(10)). Any request for review 

must be submitted within 90 days from 

the date the assessment risk assignment 

being challenged pursuant to paragraph 

(a) of this section appears on the 

institution’s quarterly certified 

statement invoice. The request shall be 

submitted to the Corporation’s Director 

of the Division of Insurance and 

Research in Washington, DC, and shall 

include documentation sufficient to 

support the change sought by the 

institution. If additional information is 

requested by the Corporation, such 

information shall be provided by the 

institution within 21 days of the date of 

the request for additional information. 

Any institution submitting a timely 

request for review will receive written 

notice from the Corporation regarding 

the outcome of its request. Upon 

completion of a review, the Director of 

the Division of Insurance and Research 

(or designee) or the Director of the 

Division of Supervision and Consumer 

Protection (or designee), as appropriate, 

shall promptly notify the institution in 

writing of his or her determination of 

whether a change is warranted. If the 

institution requesting review disagrees 

with that determination, it may appeal 

to the FDIC’s Assessment Appeals 

Committee. Notice of the procedures 

applicable to appeals will be included 

with the written determination. 

* * * * * 

(f) Effective date for changes to risk 

assignment. Changes to an insured 

institution’s risk assignment resulting 

from a supervisory ratings change 

become effective as of the date of 

written notification to the institution by 

its primary Federal regulator or state 

authority of its supervisory rating (even 

when the CAMELS component ratings 

have not been disclosed to the 

institution), if the FDIC, after taking into 

account other information that could 

affect the rating, agrees with the rating. 

If the FDIC does not agree, the FDIC will 

notify the institution of the FDIC’s 

supervisory rating; resulting changes to 

an insured institution’s risk assignment 

become effective as of the date of 

written notification to the institution by 

the FDIC. 

* * * * * 

3. In § 327.8, revise paragraphs (g), 

(h), (i), (m), (n), (o), (p), (q), and (r), and 

add paragraphs (t), (u) and (v) to read as 

follows: 

§ 327.8 Definitions. 

* * * * * 

(g) Small Institution. An insured 

depository institution with assets of less 

than $10 billion as of December 31, 

2006, and an insured branch of a foreign 

institution, shall be classified as a small 

institution. If, after December 31, 2006, 

an institution classified as large under 

paragraph (h) of this section (other than 

an institution classified as large for 

purposes of § 327.9(d)(8)) reports assets 

of less than $10 billion in its quarterly 

reports of condition for four consecutive 

quarters, the FDIC will reclassify the 

institution as small beginning the 

following quarter. 

(h) Large Institution. An institution 

classified as large for purposes of 

§ 327.9(d)(9) or an insured depository 

institution with assets of $10 billion or 

more as of December 31, 2006 (other 

than an insured branch of a foreign bank 

or a highly complex institution) shall be 

classified as a large institution. If, after 

December 31, 2006, an institution 

classified as small under paragraph (g) 

of this section reports assets of $10 

billion or more in its quarterly reports 

of condition for four consecutive 

quarters, the FDIC will reclassify the 

institution as large beginning the 

following quarter. 

(i) Highly Complex Institution. A 

highly complex institution is an insured 

depository institution with greater than 

$50 billion in total assets that is not a 

credit card bank and is wholly owned 

by a parent company with more than 

$500 billion in total assets, or wholly 

owned by one or more intermediate 

parent companies that are wholly 

owned by a holding company with more 

than $500 billion in assets, or a 

processing bank and trust company with 

greater than $10 billion in total assets, 

provided that the information required 

to calculate assessment rates as a highly 

complex institution is readily available 

to the FDIC. If, after December 31, 2010, 

an institution classified as highly 

complex falls below $50 billion in total 

assets in its quarterly reports of 

condition for four consecutive quarters, 

or its parent company or companies fall 

below $500 billion in total assets for 

four consecutive quarters, or a 

processing bank and trust company falls 

below $10 billion in total assets in its 

quarterly reports of condition for four 

consecutive quarters, the FDIC will 

reclassify the institution beginning the 

following quarter. 

* * * * * 

(m) Established depository institution. 

An established insured depository 

institution is a bank or savings 

association that has been federally 

insured for at least five years as of the 

last day of any quarter for which it is 

being assessed. 

(1) Merger or consolidation involving 

new and established institution(s). 

Subject to paragraphs (m)(2), (3), (4), 

and (5) of this section and 

§ 327.9(d)(10)(iii), (iv), when an 

established institution merges into or 

consolidates with a new institution, the 

resulting institution is a new institution 

unless: 

(i) The assets of the established 

institution, as reported in its report of 

condition for the quarter ending 

immediately before the merger, 

exceeded the assets of the new 

institution, as reported in its report of 

condition for the quarter ending 

immediately before the merger; and 

(ii) Substantially all of the 

management of the established 


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Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23533 

institution continued as management of 

the resulting or surviving institution. 

(2) Consolidation involving 

established institutions. When 

established institutions consolidate, the 

resulting institution is an established 

institution. 

(3) Grandfather exception. If a new 

institution merges into an established 

institution, and the merger agreement 

was entered into on or before July 11, 

2006, the resulting institution shall be 

deemed to be an established institution 

for purposes of this part. 

(4) Subsidiary exception. Subject to 

paragraph (m)(5) of this section, a new 

institution will be considered 

established if it is a wholly owned 

subsidiary of: 

(i) A company that is a bank holding 

company under the Bank Holding 

Company Act of 1956 or a savings and 

loan holding company under the Home 

Owners’ Loan Act, and: 

(A) At least one eligible depository 

institution (as defined in 12 CFR 

303.2(r)) that is owned by the holding 

company has been chartered as a bank 

or savings association for at least five 

years as of the date that the otherwise 

new institution was established; and 

(B) The holding company has a 

composite rating of at least ‘‘2’’ for bank 

holding companies or an above average 

or ‘‘A’’ rating for savings and loan 

holding companies and at least 75 

percent of its insured depository 

institution assets are assets of eligible 

depository institutions, as defined in 12 

CFR 303.2(r); or 

(ii) An eligible depository institution, 

as defined in 12 CFR 303.2(r), that has 

been chartered as a bank or savings 

association for at least five years as of 

the date that the otherwise new 

institution was established. 

(5) Effect of credit union conversion. 

In determining whether an insured 

depository institution is new or 

established, the FDIC will include any 

period of time that the institution was 

a federally insured credit union. 

(n) Risk assignment. For all small 

institutions and insured branched of 

foreign banks, risk assignment includes 

assignment to Risk Category I, II, III, or 

IV, and, within Risk Category I, 

assignment to an assessment rate or 

rates. For all large institutions and 

highly complex institutions, risk 

assignment includes assignment to an 

assessment rate or rates. 

(o) Unsecured debt. For purposes of 

the unsecured debt adjustment as set 

forth in § 327.9(d)(6), unsecured debt 

shall include senior unsecured 

liabilities and subordinated debt. 

(p) Senior unsecured liability. For 

purposes of the unsecured debt 

adjustment as set forth in § 327.9(d)(6), 

senior unsecured liabilities shall be the 

unsecured portion of other borrowed 

money as defined in the quarterly report 

of condition for the reporting period as 

defined in paragraph (b) of this section, 

but shall not include any senior 

unsecured debt that the FDIC has 

guaranteed under the Temporary 

Liquidity Guarantee Program, 12 CFR 

Part 370. 

(q) Subordinated debt. For purposes 

of the unsecured debt adjustment as set 

forth in § 327.9(d)(6), subordinated debt 

shall be as defined in the quarterly 

report of condition for the reporting 

period; however, subordinated debt 

shall also include limited-life preferred 

stock as defined in the quarterly report 

of condition for the reporting period. 

(r) Long-term unsecured debt. For 

purposes of the unsecured debt 

adjustment as set forth in § 327.9(d)(6), 

long-term unsecured debt shall be 

unsecured debt with at least one year 

remaining until maturity. 

* * * * * 

(t) Processing bank and trust 

company. A processing bank and trust 

company is an institution whose last 3 

years’ non-lending interest income plus 

fiduciary revenues plus investment 

banking fees exceed 50 percent of total 

revenues (and its last 3 years’ fiduciary 

revenues are non-zero). 

(u) Parent company. A parent 

company is a bank holding company 

under the Bank Holding Company Act 

of 1956 or a savings and loan holding 

company under the Home Owners’ Loan 

Act. 

(v) Credit Card Bank. A credit card 

bank is a bank for which credit card 

plus securitized receivables exceed 50 

percent of assets plus securitized 

receivables. 

4. Revise § 327.9 to read as follows: 

§ 327.9 Assessment risk categories and 

pricing methods. 

(a) Risk Categories. Each small 

insured depository institution and each 

insured branch of a foreign bank shall 

be assigned to one of the following four 

Risk Categories based upon the 

institution’s capital evaluation and 

supervisory evaluation as defined in 

this section. 

(1) Risk Category I. Institutions in 

Supervisory Group A that are Well 

Capitalized; 

(2) Risk Category II. Institutions in 

Supervisory Group A that are 

Adequately Capitalized, and institutions 

in Supervisory Group B that are either 

Well Capitalized or Adequately 

Capitalized; 

(3) Risk Category III. Institutions in 

Supervisory Groups A and B that are 

Undercapitalized, and institutions in 

Supervisory Group C that are Well 

Capitalized or Adequately Capitalized; 

and 

(4) Risk Category IV. Institutions in 

Supervisory Group C that are 

Undercapitalized. 

(b) Capital evaluations. Each small 

institution and each insured branch of 

a foreign bank will receive one of the 

following three capital evaluations on 

the basis of data reported in the 

institution’s Consolidated Reports of 

Condition and Income, Report of Assets 

and Liabilities of U.S. Branches and 

Agencies of Foreign Banks, or Thrift 

Financial Report dated as of March 31 

for the assessment period beginning the 

preceding January 1; dated as of June 30 

for the assessment period beginning the 

preceding April 1; dated as of 

September 30 for the assessment period 

beginning the preceding July 1; and 

dated as of December 31 for the 

assessment period beginning the 

preceding October 1. 

(1) Well Capitalized. (i) Except as 

provided in paragraph (b)(1)(ii) of this 

section, a Well Capitalized institution is 

one that satisfies each of the following 

capital ratio standards: Total risk-based 

ratio, 10.0 percent or greater; Tier 1 riskbased ratio, 6.0 percent or greater; and 

Tier 1 leverage ratio, 5.0 percent or 

greater. 

(ii) For purposes of this section, an 

insured branch of a foreign bank will be 

deemed to be Well Capitalized if the 

insured branch: 

(A) Maintains the pledge of assets 

required under § 347.209 of this chapter; 

and 

(B) Maintains the eligible assets 

prescribed under § 347.210 of this 

chapter at 108 percent or more of the 

average book value of the insured 

branch’s third-party liabilities for the 

quarter ending on the report date 

specified in paragraph (b) of this 

section. 

(2) Adequately Capitalized. (i) Except 

as provided in paragraph (b)(2)(ii) of 

this section, an Adequately Capitalized 

institution is one that does not satisfy 

the standards of Well Capitalized under 

this paragraph but satisfies each of the 

following capital ratio standards: Total 

risk-based ratio, 8.0 percent or greater; 

Tier 1 risk-based ratio, 4.0 percent or 

greater; and Tier 1 leverage ratio, 4.0 

percent or greater. 

(ii) For purposes of this section, an 

insured branch of a foreign bank will be 

deemed to be Adequately Capitalized if 

the insured branch: 

(A) Maintains the pledge of assets 

required under § 347.209 of this chapter; 

and 


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23534 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

(B) Maintains the eligible assets 

prescribed under § 347.210 of this 

chapter at 106 percent or more of the 

average book value of the insured 

branch’s third-party liabilities for the 

quarter ending on the report date 

specified in paragraph (b) of this 

section; and 

(C) Does not meet the definition of a 

Well Capitalized insured branch of a 

foreign bank. 

(3) Undercapitalized. An 

undercapitalized institution is one that 

does not qualify as either Well 

Capitalized or Adequately Capitalized 

under paragraphs (b)(1) and (b)(2) of this 

section. 

(c) Supervisory evaluations. Each 

small institution and each insured 

branch of a foreign bank will be 

assigned to one of three Supervisory 

Groups based on the Corporation’s 

consideration of supervisory evaluations 

provided by the institution’s primary 

Federal regulator. The supervisory 

evaluations include the results of 

examination findings by the primary 

Federal regulator, as well as other 

information that the primary Federal 

regulator determines to be relevant. In 

addition, the Corporation will take into 

consideration such other information 

(such as state examination findings, as 

appropriate) as it determines to be 

relevant to the institution’s financial 

condition and the risk posed to the 

Deposit Insurance Fund. The three 

Supervisory Groups are: 

(1) Supervisory Group ‘‘A.’’ This 

Supervisory Group consists of 

financially sound institutions with only 

a few minor weaknesses; 

(2) Supervisory Group ‘‘B.’’ This 

Supervisory Group consists of 

institutions that demonstrate 

weaknesses which, if not corrected, 

could result in significant deterioration 

of the institution and increased risk of 

loss to the Deposit Insurance Fund; and 

(3) Supervisory Group ‘‘C.’’ This 

Supervisory Group consists of 

institutions that pose a substantial 

probability of loss to the Deposit 

Insurance Fund unless effective 

corrective action is taken. 

(d) Determining Assessment Rates for 

Insured Depository Institutions. A small 

insured depository institution in Risk 

Category I shall have its initial base 

assessment rate determined using the 

financial ratios method set forth in 

paragraph (d)(1) of this section. An 

insured branch of a foreign bank in Risk 

Category I shall have its assessment rate 

determined using the weighted average 

ROCA component rating method set 

forth in paragraph (d)(2) of this section. 

A large insured depository institution 

shall have its initial base assessment 

rate determined using the large 

institution method set forth in 

paragraph (d)(3) of this section. A highly 

complex insured depository institution 

shall have its initial base assessment 

rate determined using the highly 

complex institution method set forth at 

paragraph (d)(4) of this section. 

(1) Financial ratios method. Under the 

financial ratios method for small Risk 

Category I institutions, each of six 

financial ratios and a weighted average 

of CAMELS component ratings will be 

multiplied by a corresponding pricing 

multiplier. The sum of these products 

will be added to or subtracted from a 

uniform amount. The resulting sum 

shall equal the institution’s initial base 

assessment rate; provided, however, that 

no institution’s initial base assessment 

rate shall be less than the minimum 

initial base assessment rate in effect for 

Risk Category I institutions for that 

quarter nor greater than the maximum 

initial base assessment rate in effect for 

Risk Category I institutions for that 

quarter. An institution’s initial base 

assessment rate, subject to adjustment 

pursuant to paragraphs (d)(6) and (7) of 

this section, as appropriate (resulting in 

the institution’s total base assessment 

rate, which in no case can be lower than 

50 percent of the institution’s initial 

base assessment rate), and adjusted for 

the actual assessment rates set by the 

Board under § 327.10(c), will equal an 

institution’s assessment rate. The six 

financial ratios are: Tier 1 Leverage 

Ratio; Loans past due 30–89 days/gross 

assets; Nonperforming assets/gross 

assets; Net loan charge-offs/gross assets; 

Net income before taxes/risk-weighted 

assets; and the Adjusted brokered 

deposit ratio. The ratios are defined in 

Table A.1 of Appendix A to this 

subpart. The ratios will be determined 

for an assessment period based upon 

information contained in an 

institution’s report of condition filed as 

of the last day of the assessment period 

as set out in § 327.9(b). The weighted 

average of CAMELS component ratings 

is created by multiplying each 

component by the following percentages 

and adding the products: Capital 

adequacy—25%, Asset quality—20%, 

Management—25%, Earnings—10%, 

Liquidity—10%, and Sensitivity to 

market risk—10%. The following table 

sets forth the initial values of the pricing 

multipliers: 

Risk measures * Pricing multipliers ** 

Tier 1 Leverage Ratio .................................................................................................................................................................... (0.056 ) 

Loans Past Due 30–89 Days/Gross Assets .................................................................................................................................. 0.575 

Nonperforming Assets/Gross Assets ............................................................................................................................................. 1.074 

Net Loan Charge-Offs/Gross Assets ............................................................................................................................................. 1.210 

Net Income before Taxes/Risk-Weighted Assets .......................................................................................................................... (0.764 ) 

Adjusted brokered deposit ratio ..................................................................................................................................................... 0.065 

Weighted Average CAMELS Component Rating .......................................................................................................................... 1.095 

* Ratios are expressed as percentages. 

** Multipliers are rounded to three decimal places. 

The six financial ratios and the 

weighted average CAMELS component 

rating will be multiplied by the 

respective pricing multiplier, and the 

products will be summed. To this result 

will be added the uniform amount of 

9.861. The resulting sum shall equal the 

institution’s initial base assessment rate; 

provided, however, that no institution’s 

initial base assessment rate shall be less 

than the minimum initial base 

assessment rate in effect for Risk 

Category I institutions for that quarter 

nor greater than the maximum initial 

base assessment rate in effect for Risk 

Category I institutions for that quarter. 

Appendix A to this subpart describes 

the derivation of the pricing multipliers 

and uniform amount and explains how 

they will be periodically updated. 

(i) Publication and uniform amount 

and pricing multipliers. The FDIC will 

publish notice in the Federal Register 

whenever a change is made to the 

uniform amount or the pricing 

multipliers for the financial ratios 

method. 

(ii) Implementation of CAMELS rating 

changes—(A) Changes between risk 

categories. If, during a quarter, a 

CAMELS composite rating change 

occurs that results in an institution 

whose Risk Category I assessment rate is 


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Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23535 

determined using the financial ratios 

method moving from Risk Category I to 

Risk Category II, III or IV, the 

institution’s initial base assessment rate 

for the portion of the quarter that it was 

in Risk Category I shall be determined 

using the supervisory ratings in effect 

before the change and the financial 

ratios as of the end of the quarter, 

subject to adjustment pursuant to 

paragraphs (d)(6) and (7) of this section, 

as appropriate, and adjusted for the 

actual assessment rates set by the Board 

under § 327.10(c). For the portion of the 

quarter that the institution was not in 

Risk Category I, the institution’s initial 

base assessment rate, which shall be 

subject to adjustment pursuant to 

paragraphs (d)(6), (7) and (8) of this 

section, shall be determined under the 

assessment schedule for the appropriate 

Risk Category. If, during a quarter, a 

CAMELS composite rating change 

occurs that results in an institution 

moving from Risk Category II, III or IV 

to Risk Category I, and its initial base 

assessment rate would be determined 

using the financial ratios method, then 

that method shall apply for the portion 

of the quarter that it was in Risk 

Category I, subject to adjustment 

pursuant to paragraphs (d)(6) and (7) of 

this section, as appropriate, and 

adjusted for the actual assessment rates 

set by the Board under § 327.10(c). For 

the portion of the quarter that the 

institution was not in Risk Category I, 

the institution’s initial base assessment 

rate, which shall be subject to 

adjustment pursuant to paragraphs 

(d)(6), (7) and (8) of this section, shall 

be determined under the assessment 

schedule for the appropriate Risk 

Category. 

(B) Changes within Risk Category I. If, 

during a quarter, an institution’s 

CAMELS component ratings change in a 

way that would change the institution’s 

initial base assessment rate within Risk 

Category I, the initial base assessment 

rate for the period before the change 

shall be determined under the financial 

ratios method using the CAMELS 

component ratings in effect before the 

change, subject to adjustment pursuant 

to paragraphs (d)(6) and (7) of this 

section, as appropriate. Beginning on 

the date of the CAMELS component 

ratings change, the initial base 

assessment rate for the remainder of the 

quarter shall be determined using the 

CAMELS component ratings in effect 

after the change, again subject to 

adjustment pursuant to paragraphs 

(d)(6) and (7) of this section, as 

appropriate. 

(2) Assessment rate for insured 

branches of foreign banks—(i) Insured 

branches of foreign banks in Risk 

Category I. Insured branches of foreign 

banks in Risk Category I shall be 

assessed using the weighted average 

ROCA component rating. 

(ii) Weighted average ROCA 

component rating. The weighted 

average ROCA component rating shall 

equal the sum of the products that result 

from multiplying ROCA component 

ratings by the following percentages: 

Risk Management—35%, Operational 

Controls—25%, Compliance—25%, and 

Asset Quality—15%. The weighted 

average ROCA rating will be multiplied 

by 5.076 (which shall be the pricing 

multiplier). To this result will be added 

1.873 (which shall be a uniform amount 

for all insured branches of foreign 

banks). The resulting sum—the initial 

base assessment rate—will equal an 

institution’s total base assessment rate; 

provided, however, that no institution’s 

total base assessment rate will be less 

than the minimum total base assessment 

rate in effect for Risk Category I 

institutions for that quarter nor greater 

than the maximum total base 

assessment rate in effect for Risk 

Category I institutions for that quarter. 

(iii) No insured branch of a foreign 

bank in any risk category shall be 

subject to the unsecured debt 

adjustment, the secured liability 

adjustment, the brokered deposit 

adjustment, or the adjustment in 

paragraph (d)(5) of this section. 

(iv) Implementation of changes 

between Risk Categories for insured 

branches of foreign banks. If, during a 

quarter, a ROCA rating change occurs 

that results in an insured branch of a 

foreign bank moving from Risk Category 

I to Risk Category II, III or IV, the 

institution’s initial base assessment rate 

for the portion of the quarter that it was 

in Risk Category I shall be determined 

using the weighted average ROCA 

component rating. For the portion of the 

quarter that the institution was not in 

Risk Category I, the institution’s initial 

base assessment rate shall be 

determined under the assessment 

schedule for the appropriate Risk 

Category. If, during a quarter, a ROCA 

rating change occurs that results in an 

insured branch of a foreign bank moving 

from Risk Category II, III or IV to Risk 

Category I, the institution’s assessment 

rate for the portion of the quarter that 

it was in Risk Category I shall equal the 

rate determined as provided using the 

weighted average ROCA component 

rating. For the portion of the quarter that 

the institution was not in Risk Category 

I, the institution’s initial base 

assessment rate shall be determined 

under the assessment schedule for the 

appropriate Risk Category. 

(v) Implementation of changes within 

Risk Category I for insured branches of 

foreign banks. If, during a quarter, an 

insured branch of a foreign bank 

remains in Risk Category I, but a ROCA 

component rating changes that would 

affect the institution’s initial base 

assessment rate, separate assessment 

rates for the portion(s) of the quarter 

before and after the change(s) shall be 

determined under paragraph (d)(2) of 

this section. 

(3) Assessment scorecard for large 

institutions (other than highly complex 

institutions). All large institutions other 

than highly complex institutions shall 

have their quarterly assessments 

determined using the scorecard for large 

institutions. 

SCORECARD FOR LARGE INSTITUTIONS

Components Scorecard measures Score 

CAMELS ..................................................... Weighted Average CAMELS .......................................................................................... 25–100 

Ability to Withstand Asset-Related Stress Tier 1 Common Capital Ratio (Tier 1 Common Capital/Total Average Assets less 

Disallowed Intangibles).

0–100 

Concentration Measure ................................................................................................... 0–100 

Higher Risk Concentrations; or Growth-Adjusted Portfolio Concentrations. 

Core Earnings/Average Total Assets ............................................................................. 0–100 

Credit Quality Measure ................................................................................................... 0–100 

Criticized and Classified Items/Tier 1 Capital and Reserves; or 


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23536 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

SCORECARD FOR LARGE INSTITUTIONS—Continued 

Components Scorecard measures Score 

Underperforming Assets/Tier 1 Capital and Reserves. 

Subtotal ........................................................................................................................... 0–100 

Outlier Add-ons 

Criticized and Classified Items/Tier 1 Capital and Reserves; or .................................... 30 

Underperforming Assets/Tier 1 Capital and Reserves 

Higher Risk Concentrations ............................................................................................ 30 

Total ability to withstand asset-related stress score ...................................................... 0–160 

Ability to Withstand Funding-Related 

Stress.

Core Deposits/Total Liabilities ........................................................................................ 0–100 

Unfunded Commitments/Total Assets ............................................................................ 0–100 

Liquid Assets/Short-Term Liabilities (liquidity coverage ratio) ........................................ 0–100 

Total ability to withstand funding-related stress score ................................................... 0–100 

Total Performance Score ................................................................................................ 0–100 

Potential Loss Severity .............................. Potential Losses/Total Domestic Deposits (loss severity measure) .............................. 0–100 

Secured Liabilities/Total Domestic Deposits .................................................................. 0–100 

Total loss severity score ..................... ......................................................................................................................................... 0–100 

Note: The large institution scorecard produces two scores: Performance and loss severity. 

(i) Performance score. The 

performance score for large institutions 

is the weighted average of three inputs: 

Weighted average CAMELS rating 

(30%); ability to withstand asset-related 

stress measures (50%); and ability to 

withstand funding-related stress 

measures (20%). 

(A) Weighted Average CAMELS score. 

To derive the weighted average 

CAMELS score, a weighted average of 

an institution’s CAMELS component 

ratings is calculated using the following 

weights: 

CAMELS component Weight 

(percent) 

C ............................................... 25 

A ............................................... 20 

M ............................................... 25 

E ............................................... 10 

L ................................................ 10 

S ............................................... 10 

A weighted average CAMELS rating is 

converted to a score that ranges from 25 

to 100. A weighted average rating of 1 

equals a score of 25 and a weighted 

average of 3.5 or greater equals a score 

of 100. Weighted average CAMELS 

ratings between 1 and 3.5 are assigned 

a score between 25 and 100 according 

to the following equation: 

S = 25 + [(20/3)*(C2 ¥ 1)], 

Where: 

S = the weighted average CAMELS score and 

C = the weighted average CAMELS rating. 

(B) Ability to Withstand Asset-Related 

Stress. The ability to withstand assetrelated stress component contains four 

measures: Tier 1 common ratio; 

Concentration measure (the higher of 

the higher-risk concentrations measure 

or growth-adjusted portfolio 

concentrations measures); Core earnings 

to average assets; and Credit quality 

measure (the higher of the criticized and 

classified assets to Tier 1 capital and 

reserves or underperforming assets to 

Tier 1 capital and reserves). Appendices 

B and C define these measures in detail 

and give the source of the data used to 

determine them. 

The concentration measure score is 

the higher of the scores of the two 

measures that make up the 

concentration measure score (higher risk 

concentrations or growth adjusted 

portfolio concentrations). The credit 

quality score is the higher of the 

criticized and classified items ratio 

score or the underperforming assets 

ratio score. Each asset related stress 

measure is assigned the following cutoff 

values and weight to derive a score for 

an institution’s ability to withstand 

asset-related stress: 

CUTOFF VALUES AND WEIGHTS FOR ABILITY TO WITHSTAND ASSET-RELATED STRESS MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Tier 1 Common Capital Ratio ...................................................................................................... 5.8 12.9 15 

Concentration Measure: .............................................................................................................. ........................ ........................ 35 

Higher Risk Concentrations; or ............................................................................................ 0.0 3.2 ........................

Growth-Adjusted Portfolio Concentrations ........................................................................... 7.6 154.7 ........................

Core Earnings/Average Total Assets .......................................................................................... 0.0 2.3 15 

Credit Quality Measure: ............................................................................................................... ........................ ........................ 35 

Criticized and Classified Items/Tier 1 Capital and Reserves; or ......................................... 6.5 100.0 ........................


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CUTOFF VALUES AND WEIGHTS FOR ABILITY TO WITHSTAND ASSET-RELATED STRESS MEASURES—Continued 

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Underperforming Assets/Tier 1 Capital and Reserves ........................................................ 2.3 35.1 ........................

For each of the risk measures within 

the ability to withstand asset-related 

stress portion of the scorecard, a value 

reflecting lower risk than the cutoff 

value that results in a score of 0 will 

also receive a score of 0, where 0 equals 

the lowest risk for that measure. A value 

reflecting higher risk than the cutoff 

value that results in a score of 100 will 

also receive a score of 100, where 100 

equals the highest risk for that measure. 

A risk measure value between the 

minimum and maximum cutoff values 

is converted linearly to a score between 

0 and 100. For the Concentration 

Measure and Credit Quality Measures, a 

lower ratio implies lower risk and a 

higher ratio implies higher risk. For 

these measures, a value between the 

minimum and maximum cutoff values 

will be converted linearly to a score 

between 0 and 100, according to the 

following formula: 

S = (V ¥ Min)*100/(Max ¥ Min), 

Where S is score (rounded to three decimal 

points), V is the value of the measure, 

Min is the minimum cutoff value and 

Max is the maximum cutoff value. 

For the Tier 1 Common Capital Ratio 

and Core Earnings to Average Total 

Assets Ratio, a lower value represents 

higher risk and a higher value 

represents lower risk. For these 

measures, a value between the 

minimum and maximum cutoff values 

is converted linearly to a score between 

0 and 100, according to the following 

formula: 

S = (Max ¥ V)*100/(Max ¥ Min), 

Where S is score (rounded to three decimal 

points), V is the value of the measure, 

Min is the minimum cutoff value and 

Max is the maximum cutoff value. 

Each score is multiplied by a 

respective weight and the resulting 

weighted score for each measure is 

summed to arrive at an ability to 

withstand asset-related stress score, 

which ranges from 0 to 100. 

For extreme values of certain 

measures reflecting particularly high 

risk, this score can increase through an 

outlier add-on. If an institution’s ratio of 

criticized and classified items to Tier 1 

capital and reserves exceeds 100 percent 

or its ratio of underperforming assets to 

Tier 1 capital and reserves exceeds 50.2 

percent, the ability to withstand assetrelated stress component score is 

increased by 30 points. Additionally, if 

the higher risk concentration measure 

exceeds 4.8, the ability to withstand 

asset-related stress component score is 

increased by 30 points. These increases 

(outlier add-ons) are determined 

separately and can increase the ability 

to withstand asset-related score by up to 

60 points; thus, the ability to withstand 

asset-related component score can be as 

high as 160 points. 

(C) Ability to Withstand FundingRelated Stress. The ability to withstand 

funding-related stress component 

contains three risk measures: A core 

deposits to liabilities ratio, an unfunded 

commitments to total assets ratio, and a 

liquidity coverage ratio. Appendix B 

describes these ratios in detail and gives 

the source of the data used to determine 

them. The ability to withstand fundingrelated stress component score is the 

weighted average of the three measure 

scores. Each measure is assigned the 

following cutoff values and weights to 

derive a score for an institution’s ability 

to withstand funding-related stress: 

CUTOFF VALUES AND WEIGHTS FOR ABILITY TO WITHSTAND FUNDING-RELATED STRESS MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Core Deposits/Total Liabilities ..................................................................................................... 3.2 79.1 40 

Unfunded Commitments/Total Assets ......................................................................................... 0.3 42.2 40 

Liquid Assets/Short-term Liabilities (Liquidity Coverage Ratio) .................................................. 5.6 170.9 20 

A risk measure value reflecting lower 

risk than the cutoff value that results in 

a score of 0, will also receive a score of 

0, where 0 equals the lowest risk for that 

measure. A risk measure value reflecting 

higher risk than the cutoff value that 

results in a score of 100, will also 

receive a score of 100, where 100 equals 

the highest risk for that measure. For the 

Core Deposits/Liabilities measure and 

the Liquidity Coverage Ratio, a lower 

ratio implies higher risk and a higher 

ratio implies lower risk. For these 

measures, a value between the 

minimum and maximum cutoff values 

will be converted linearly to a score 

between 0 and 100, according to the 

following formula: 

S = (Max ¥ V)*100/(Max ¥ Min) 

Where S is score (rounded to three decimal 

points), V is the value of the measure, 

Min is the minimum cutoff value and 

Max is the maximum cutoff value. 

For the Unfunded Commitments/ 

Assets measure, a lower value 

represents lower risk and a higher value 

represents higher risk. For these 

measures, a value between the 

minimum and maximum cutoff values 

is converted linearly to a score between 

0 and 100, according to the following 

formula: 

S = (V ¥ Min)*100/(Max ¥ Min) 

Where S is score (rounded to three decimal 

points), V is the value of the measure, 

Min is the minimum cutoff value and 

Max is the maximum cutoff value. 

(D) Calculation of Performance Score. 

The weighted average CAMELS score, 

the ability to withstand asset-related 

stress score, and the ability to withstand 

funding-related stress score are 

multiplied by their weights and the 

results are summed to arrive at the 

performance score. The performance 

score cannot exceed 100. The 

performance score is subject to 

adjustment, up or down, by a maximum 

of 15 points, as set forth in section 

(d)(5). The resulting score cannot be less 

than 0 or more than 100. 

(ii) Loss severity score. The loss 

severity score is based on two measures: 

Loss severity measure and secured 

liabilities to total domestic deposits 

ratio. Appendices B and D describe 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23538 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

these measures in detail. The loss 

severity score is the weighted average of 

these scores. Each measure is assigned 

the following cutoff values and weight 

to derive a score for an institution’s loss 

severity score: 

CUTOFF VALUES AND WEIGHTS FOR LOSS SEVERITY SCORE MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Potential Losses/Total Domestic Deposits (loss severity measure) ........................................... 0.0 30.1 50 

Secured Liabilities/Total Domestic Deposits ............................................................................... 0.0 75.7 50 

A risk measure value reflecting lower 

risk than the minimum cutoff value 

results in a score of 0, where 0 equals 

the lowest risk for that measure. A risk 

measure value reflecting higher risk 

than the maximum cutoff value results 

in a score of 100, where 100 equals the 

highest risk for that measure. A risk 

measure value between the minimum 

and maximum cutoff values is 

converted linearly to a score between 0 

and 100, according to the following 

formula: 

S = (V ¥ Min)*100/(Max ¥ Min) 

Where S is score (rounded to three decimal 

points), V is the value of the measure, 

Min is the minimum cutoff value and 

Max is the maximum cutoff value. 

The loss severity score is subject to 

adjustment, up or down, by a maximum 

of 15 points, as set forth in section 

(d)(5). The resulting score cannot be less 

than 0 or more than 100. 

(iii) Initial base assessment rate. The 

performance and loss severity scores, 

with any adjustments under paragraph 

(d)(5) of this section, are converted to an 

initial base assessment rate. The loss 

severity score is converted into a loss 

severity measure that ranges from 0.8 

(score of 5 or lower) and 1.2 (score of 

85 or higher). Scores that fall at or below 

the minimum cutoff of 5 receive a loss 

severity measure of 0.8 and scores that 

falls at or above the maximum cutoff of 

85 receive a loss severity score of 1.2. 

The following linear interpolation 

converts loss severity scores between 

the cutoffs into a loss severity measure: 

(Loss Severity Measure = 0.8 + [(Loss 

Severity Score ¥ 5) × 0.005]. The 

performance score is multiplied by the 

loss severity measure to produce a total 

score (total score = performance score * 

loss severity measure). The total score 

cannot exceed 100. A large institution 

with a total score of 30 or lower pays the 

minimum initial base assessment rate 

and an institution with a total score of 

90 or greater pays the maximum initial 

base assessment rate. For total scores 

between 30 and 90, initial base 

assessment rates rise at an increasing 

rate as the total score increases, 

calculated according to the following 

formula: 

Rate Score= −+ ×⎛

⎝

⎜ ⎞

⎠

⎟

⎛

⎝

⎜

⎜

⎞

⎠

Minimum Rate 0 165289 68 02027 ⎟ 100

5

. . ⎟

Where Rate is the initial base assessment rate 

and Minimum Rate is the minimum 

initial base assessment rate then in 

effect. Initial base assessment rates are 

subject to adjustment pursuant to 

sections (d)(6), (d)(7), and (d)(8), 

resulting in the institution’s total base 

assessment rate, which in no case can be 

lower than 50 percent of the institution’s 

initial base assessment rate. 

(4) Assessment scorecard for highly 

complex institutions. All highly 

complex institutions shall have their 

quarterly assessments determined using 

the scorecard for highly complex 

institutions. 

SCORECARD FOR HIGHLY COMPLEX INSTITUTIONS

Components Scorecard measures Score 

CAMELS ..................................................... Weighted Average CAMELS .......................................................................................... 25–100 

Market Indicator ......................................... Senior Bond Spread ....................................................................................................... 0–100 

Outlier Add-ons 

Parent Company Tangible Common Equity (TCE) Ratio ............................................... 30 

Total Market Indicator score ........................................................................................... 0–130 

Ability to Withstand Asset-Related Stress Tier 1 Common Capital Ratio (Tier 1 Common Capital/Total Average Assets less 

Disallowed Intangibles).

0–100 

Concentration Measure ................................................................................................... 0–100 

Higher Risk Concentrations; or 

Growth-Adjusted Portfolio Concentrations.

Core Earnings/Average Total Assets ............................................................................. 0–100 

Credit Quality Measure ................................................................................................... 0–100 

Criticized and Classified Items/Tier 1 Capital and Reserves.


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.011</MATH>
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23539 

SCORECARD FOR HIGHLY COMPLEX INSTITUTIONS—Continued 

Components Scorecard measures Score 

Underperforming Assets/Tier 1 Capital and Reserves.

10-day 99% VaR/Tier 1 Capital ...................................................................................... 0–100 

Subtotal ........................................................................................................................... 0–100 

Outlier Add-ons 

Criticized and Classified Items/Tier 1 Capital and Reserves; 30 

or 

Underperforming Assets/Tier 1 Capital and Reserves 

Higher Risk Concentrations Measure ............................................................................. 30 

Total ability to withstand asset-related stress score ...................................................... 0–160 

Ability to Withstand Funding-Related 

Stress.

Core Deposits/Total Liabilities ........................................................................................ 0–100 

Unfunded Commitments/Total Assets ............................................................................ 0–100 

Liquid Assets/Short-term Liabilities (liquidity coverage ratio) ......................................... 0–100 

Short-term Funding/Total Assets .................................................................................... 0–100 

Subtotal ........................................................................................................................... 0–100 

Outlier Add-ons 

Short-term funding/Total Assets ..................................................................................... 30 

Total ability to withstand funding-related stress score ................................................... 0–130 

Total Performance Score ................................................................................................ 0–100 

Potential Loss Severity .............................. Potential Losses/Total Domestic Deposits (loss severity measure) .............................. 0–100 

Secured Liabilities/Total Domestic Deposits .................................................................. 0–100 

Total loss severity score ................................................................................................. 0–100 

The scorecard for highly complex 

institutions contains the performance 

components and the loss severity 

components of the large bank scorecard 

and employs the same methodology. 

The assessment process set forth in 

section (d)(3) for the large bank 

scorecard applies to highly complex 

institutions, modified as follows. The 

scorecard for highly-complex 

institutions contains an additional 

component—market indicator—in the 

performance score; an additional 

component—10-day 99 percent Value at 

Risk (VaR)/Tier 1 capital—in the ability 

to withstand asset-related stress; and an 

additional component—short-term 

funding to total assets ratio—in the 

ability to withstand funding-related 

stress. 

(i) Performance score for highly 

complex institutions. The performance 

score for highly complex institutions is 

the weighted average of four inputs: 

Weighted average CAMELS rating 

(20%); market indicator score (10%); 

ability to withstand asset-related stress 

score (50%); and ability to withstand 

funding-related stress score (20%). To 

calculate the performance score for 

highly complex institutions, the 

weighted average CAMELS score, the 

market indicator score, the ability to 

withstand asset-related stress score, and 

ability to withstand funding-related 

stress score are multiplied by their 

weights and the results are summed to 

arrive at the performance score. The 

resulting score cannot exceed 100. 

(A) Market indicator. The market 

indicator component contains one 

component—the senior bond spread 

score, and one outlier add-on—the 

Parent Tangible Common Equity (TCE) 

ratio. The senior bond spread is 

converted to a score according to the 

linear interpolation method used for the 

large bank scorecard. The minimum and 

maximum cutoff values for the market 

indicator measure are: 

CUTOFF VALUES AND WEIGHTS FOR MARKET INDICATOR MEASURE

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Senior Bond Spread .................................................................................................................... 0.6 3.8 100 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23540 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

A risk measure value reflecting lower 

risk than the minimum cutoff value 

results in a score of 0, where 0 equals 

the lowest risk for that measure. A risk 

measure value reflecting higher risk 

than the maximum cutoff value results 

in a score of 100, where 100 equals the 

highest risk for that measure. A value 

between the minimum and maximum 

cutoff values will be converted linearly 

to a score between 0 and 100, according 

to the following formula: 

S = (V ¥ Min)*100/(Max ¥ Min) 

The market indicator component 

score can be adjusted by up to 30 points 

if the outlier add-on—institution’s 

parent company’s TCE ratio—falls 

below 4 percent. Including the outlier 

add-on, the market indicator component 

score can be as high as 130 points. 

(B) Ability to withstand asset-related 

stress. The scorecard for highly complex 

institutions adds one additional factor 

to the ability to withstand asset-related 

stress component—the 10-day 99 

percent Value at Risk (VaR)/Tier 1 

capital. The cutoff values and weights 

for ability to withstand asset-related 

stress measures are set forth below. 

CUTOFF VALUES AND WEIGHTS FOR ABILITY TO WITHSTAND ASSET-RELATED STRESS MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Tier 1 Common Ratio .................................................................................................................. 5.8 12.9 10 

Concentration Measure ............................................................................................................... ........................ ........................ 35 

Higher Risk Concentrations; or ............................................................................................ 0.0 3.2 ........................

Growth-Adjusted Portfolio Concentrations ........................................................................... 7.6 154.7 ........................

Core Earnings/Average Total Assets .......................................................................................... 0.0 2.3 10 

Credit Quality Measure ................................................................................................................ ........................ ........................ 35 

Criticized and Classified Items/Tier 1 Capital and Reserves; or ......................................... 6.5 100.0 ........................

Underperforming Assets/Tier 1 Capital and Reserves ........................................................ 2.3 35.1 ........................

10-day 99% VaR/Tier 1 Capital ................................................................................................... 0.1 0.5 10 

Appendix B describes these measures 

in detail and gives the source of the data 

used to calculate the measures. 

(C) Ability to withstand funding 

related stress. The scorecard for highly 

complex institutions adds one 

additional factor to the ability to 

withstand funding-related stress 

component—the short-term funding to 

total assets ratio. The cutoff values and 

weights for ability to withstand fundingrelated stress measures for highly 

complex institutions are set forth below. 

CUTOFF VALUES AND WEIGHTS FOR ABILITY TO WITHSTAND FUNDING-RELATED STRESS MEASURES

Scorecard measures 

Cutoff values Weight 

(percent) Minimum Maximum 

Core Deposits/Total Liabilities ..................................................................................................... 3.2 79.1 30 

Unfunded Commitments/Total Assets ......................................................................................... 0.3 42.2 30 

Liquid Assets/Short-term Liabilities (liquidity coverage ratio) ...................................................... 5.6 170.9 20 

Short-term Funding/Total Assets ................................................................................................. 0.0 19.1 20 

Appendix B describes these measures 

in detail and gives the source of the data 

used to calculate the measures. 

The scorecard for highly complex 

institutions adds an additional outlier 

add-on to the scorecard for large 

institutions. The ability to withstand 

funding-related stress component score 

for highly complex institutions is 

adjusted by 30 points if the ratio of short 

term funding to total assets exceeds 26.9 

percent. The maximum ability to 

withstand funding-related stress 

component score for highly complex 

institutions, including the outlier addon, is 130 points. 

(ii) Loss severity score for highly 

complex institutions. The loss severity 

score for highly complex institutions is 

calculated as provided for the loss 

severity score for large institutions in 

section (d)(3)(ii). 

(iii) The performance score and the 

loss severity score for highly complex 

institutions can be adjusted, up or 

down, by maximum of 15 points each, 

as set forth in section (d)(5), resulting in 

the institution’s initial base assessment 

rate. 

(iv) The initial base assessment rate 

for highly complex institutions is 

calculated from the total score in the 

same manner as for large institutions as 

set forth in section (d)(3). Initial base 

assessment rates are subject to 

adjustment pursuant to sections (d)(6), 

(d)(7), and (d)(8), resulting in the 

institution’s total base assessment rate, 

which in no case can be lower than 50 

percent of the institution’s initial base 

assessment rate. 

(5) Adjustment to performance score 

and/or loss severity score for large 

institutions and highly complex 

institutions. The performance score and 

the loss severity score for large 

institutions and highly complex 

institutions are subject to adjustment 

under paragraph (d)(5) of this section, 

up or down, by a maximum of 15 points 

each, based upon significant risk factors 

that are not adequately captured in the 

appropriate scorecard. In making such 

adjustments, the FDIC may consider 

such information as financial 

performance and condition information 

and other market or supervisory 

information. Appendix E lists some, but 

not all, criteria that the FDIC may 

consider in determining whether to 

make such adjustments. 

(i) Prior notice of adjustments—(A) 

Prior notice of upward adjustment. Prior 

to making any upward adjustment to an 

institution’s performance score and/or 

loss severity score because of 

considerations of additional risk 

information, the FDIC will formally 

notify the institution and its primary 

Federal regulator and provide an 

opportunity to respond. This 

notification will include the reasons for 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23541 

the adjustment(s) and when the 

adjustment(s) will take effect. 

(B) Prior notice of downward 

adjustment. Prior to making any 

downward adjustment to an 

institution’s performance score and/or 

loss severity score because of 

considerations of additional risk 

information, the FDIC will formally 

notify the institution’s primary Federal 

regulator and provide an opportunity to 

respond. 

(ii) Determination whether to adjust 

upward; effective period of adjustment. 

After considering an institution’s and 

the primary Federal regulator’s 

responses to the notice, the FDIC will 

determine whether the adjustment to an 

institution’s performance score and/or 

loss severity score is warranted, taking 

into account any revisions to scorecard 

measures, as well as any actions taken 

by the institution to address the FDIC’s 

concerns described in the notice. The 

FDIC will evaluate the need for the 

adjustment each subsequent assessment 

period. The amount of adjustment will 

in no event be larger than that contained 

in the initial notice without further 

notice to, and consideration of, 

responses from the primary Federal 

regulator and the institution. 

(iii) Determination whether to adjust 

downward; effective period of 

adjustment. After considering the 

primary Federal regulator’s responses to 

the notice, the FDIC will determine 

whether the adjustment to performance 

score and/or loss severity score is 

warranted, taking into account any 

revisions to scorecard measures, as well 

as any actions taken by the institution 

to address the FDIC’s concerns 

described in the notice. Any downward 

adjustment in an institution’s 

performance score and/or loss severity 

score will remain in effect for 

subsequent assessment periods until the 

FDIC determines that an adjustment is 

no longer warranted. Downward 

adjustments will be made without 

notification to the institution. However, 

the FDIC will provide advance notice to 

an institution and its primary Federal 

regulator and give them an opportunity 

to respond before removing a downward 

adjustment. 

(iv) Adjustment without notice. 

Notwithstanding the notice provisions 

set forth above, the FDIC may change an 

institution’s performance score and/or 

loss severity score without advance 

notice under this paragraph, if the 

institution’s supervisory ratings or the 

scorecard measures deteriorate. 

(6) Unsecured debt adjustment to 

initial base assessment rate for all 

institutions. All small, large, and highly 

complex institutions, except new small 

institutions as provided under 

paragraph (d)(10)(i) of this section, are 

subject to downward adjustment of 

assessment rates for unsecured debt, 

based on the ratio of long-term 

unsecured debt (and, for small 

institutions as defined in paragraph 

(d)(6)(ii) of this section, specified 

amounts of Tier 1 capital) to domestic 

deposits. Any unsecured debt 

adjustment shall be made after any 

adjustment under paragraph (d)(5) of 

this section. Insured branches of foreign 

banks are not subject to the unsecured 

debt adjustment as provided in 

paragraph (d)(2)(iii). 

(i) Large institutions and highly 

complex institutions. The unsecured 

debt adjustment for large institutions 

and highly complex institutions shall be 

determined by multiplying the 

institution’s ratio of long-term 

unsecured debt to domestic deposits by 

40 basis points. 

(ii) Small institutions—The unsecured 

debt adjustment for small institutions 

will factor in an amount of Tier 1 capital 

(qualified Tier 1 capital) in addition to 

any long-term unsecured debt; the 

amount of qualified Tier 1 capital will 

be the sum of the amounts set forth 

below: 

Range of Tier 1 capital to adjusted average assets 

Amount of Tier 

1 capital within 

range which is 

qualified 

(percent) 

≤ 5% ..................................... 0 

> 5% and ≤ 6% .................... 10 

> 6% and ≤ 7% .................... 20 

> 7% and ≤ 8% .................... 30 

> 8% and ≤ 9% .................... 40 

> 9% and ≤ 10% .................. 50 

> 10% and ≤ 11% ................ 60 

> 11% and ≤ 12% ................ 70 

> 12% and ≤ 13% ................ 80 

> 13% and ≤ 14% ................ 90 

> 14% ................................... 100 

For institutions that file Thrift 

Financial Reports, adjusted total assets 

will be used in place of adjusted average 

assets in the preceding table. The sum 

of qualified Tier 1 capital and long-term 

unsecured debt as a percentage of 

domestic deposits will be multiplied by 

40 basis points to produce the 

unsecured debt adjustment for small 

institutions. 

(iii) Limitation—No unsecured debt 

adjustment for any institution shall 

exceed 5 basis points. No unsecured 

debt adjustment for any institution shall 

result in a total base assessment rate that 

is less than 50 percent of the 

institution’s initial base assessment rate. 

(iv) Applicable quarterly reports of 

condition—Ratios for any given quarter 

shall be calculated from quarterly 

reports of condition (Call Reports and 

Thrift Financial Reports) filed by each 

institution as of the last day of the 

quarter. 

(7) Secured liability adjustment for all 

institutions. All institutions, except 

insured branches of foreign banks as 

provided under paragraph (d)(2)(iii) of 

this section, are subject to upward 

adjustment of their assessment rate 

based upon the ratio of their secured 

liabilities to domestic deposits. Any 

such adjustment shall be made after any 

applicable adjustment under paragraph 

(d)(5) or (d)(6) of this section. 

(i) Secured liabilities for banks— 

Secured liabilities for banks include 

Federal Home Loan Bank advances, 

securities sold under repurchase 

agreements, secured Federal funds 

purchased and other borrowings that are 

secured as reported in banks’ quarterly 

Call Reports. 

(ii) Secured liabilities for savings 

associations—Secured liabilities for 

savings associations include Federal 

Home Loan Bank advances as reported 

in quarterly Thrift Financial Reports 

(‘‘TFRs’’). Secured liabilities for savings 

associations also include securities sold 

under repurchase agreements, secured 

Federal funds purchased or other 

borrowings that are secured. 

(iii) Calculation—An institution’s 

ratio of secured liabilities to domestic 

deposits will, if greater than 25 percent, 

increase its assessment rate, but any 

such increase shall not exceed 50 

percent of its assessment rate before the 

secured liabilities adjustment. For an 

institution that has a ratio of secured 

liabilities (as defined in paragraph (ii) 

above) to domestic deposits of greater 

than 25 percent, the institution’s 

assessment rate (after taking into 

account any adjustment under 

paragraphs (d)(5) or (6) of this section) 

will be multiplied by the following 

amount: the ratio of the institution’s 

secured liabilities to domestic deposits 

minus 0.25. Ratios of secured liabilities 

to domestic deposits shall be calculated 

from the report of condition, or similar 

report, filed by each institution. 

(8) Brokered Deposit Adjustment. All 

small institutions in Risk Categories II, 

III, and IV, all large institutions, and all 

highly complex institutions shall be 

subject to an assessment rate adjustment 

for brokered deposits. Any such 

brokered deposit adjustment shall be 

made after any adjustment under 

paragraph (d)(5), (d)(6) or (d)(7) of this 

section. The brokered deposit 

adjustment includes all brokered 

deposits as defined in Section 29 of the 

Federal Deposit Insurance Act (12 

U.S.C. 1831f), and 12 CFR 337.6, 

including reciprocal deposits as defined 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23542 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

in § 327.8(r), and brokered deposits that 

consist of balances swept into an 

insured institution by another 

institution. The adjustment under this 

paragraph is limited to those 

institutions whose ratio of brokered 

deposits to domestic deposits is greater 

than 10 percent; asset growth rates do 

not affect the adjustment. The 

adjustment is determined by 

multiplying by 25 basis points the 

difference between an institution’s ratio 

of brokered deposits to domestic 

deposits and 0.10. The maximum 

brokered deposit adjustment will be 10 

basis points. Brokered deposit ratios for 

any given quarter are calculated from 

the quarterly reports of condition filed 

by each institution as of the last day of 

the quarter. Insured branches of foreign 

banks are not subject to the brokered 

deposit adjustment as provided in 

section (d)(2)(iii). 

(9) Request to be treated as a large 

institution—(i) Procedure. Any 

institution in Risk Category I with assets 

of between $5 billion and $10 billion 

may request that the FDIC determine its 

assessment rate as a large institution. 

The FDIC will grant such a request if it 

determines that it has sufficient 

information to do so. Any such request 

must be made to the FDIC’s Division of 

Insurance and Research. Any approved 

change will become effective within one 

year from the date of the request. If an 

institution whose request has been 

granted subsequently reports assets of 

less than $5 billion in its report of 

condition for four consecutive quarters, 

the FDIC will consider such institution 

to be a small institution subject to the 

financial ratios method. 

(ii) Time limit on subsequent request 

for alternate method. An institution 

whose request to be assessed as a large 

institution is granted by the FDIC shall 

not be eligible to request that it be 

assessed as a small institution for a 

period of three years from the first 

quarter in which its approved request to 

be assessed as a large bank became 

effective. Any request to be assessed as 

a small institution must be made to the 

FDIC’s Division of Insurance and 

Research. 

(iii) An institution that disagrees with 

the FDIC’s determination that it is a 

large or small institution may request 

review of that determination pursuant to 

§ 327.4(c). 

(10) New and established institutions 

and exceptions—(i) New small 

institutions. A new small institution 

that is well capitalized shall be assessed 

the Risk Category I maximum initial 

base assessment rate for the relevant 

assessment period, except as provided 

in § 327.8(m)(1), (2), (3), (4), (5) and 

paragraphs (d)(10)(ii) and (iii) of this 

section. No new small institution in any 

risk category shall be subject to the 

unsecured debt adjustment as 

determined under paragraph (d)(6) of 

this section. All new small institutions 

in any Risk Category shall be subject to 

the secured liability adjustment as 

determined under paragraph (d)(7) of 

this section. All new small institutions 

in Risk Categories II, III, and IV shall be 

subject to the brokered deposit 

adjustment as determined under 

paragraph (d)(8) of this section. 

(ii) New large institutions and new 

highly complex institutions. All new 

large institutions and all new highly 

complex institutions shall be assessed 

under the appropriate method provided 

at paragraph (d)(3) or (d)(4) of this 

section and subject to the adjustments 

provided at paragraphs (d)(5), (d)(7), 

and (d)(8) of this section. No new 

Highly Complex or large institutions are 

entitled to adjustment under paragraph 

(d)(6) of this section. If a large or highly 

complex institution has not yet received 

CAMELS ratings, it will be given a 

weighted CAMELS rating of 2 for 

assessment purposes until actual 

CAMELS ratings are assigned. 

(iii) CAMELS ratings for the surviving 

institution in a merger or consolidation. 

When an established institution merges 

with or consolidates into a new 

institution, if the FDIC determines the 

resulting institution to be an established 

institution under § 327.8(m)(1), its 

CAMELS ratings for assessment 

purposes will be based upon the 

established institution’s ratings prior to 

the merger or consolidation until new 

ratings become available. 

(iv) Rate applicable to institutions 

subject to subsidiary or credit union 

exception. If a small institution is 

considered established under 

§ 327.8(m)(4) and (5), but does not have 

CAMELS component ratings, it shall be 

assessed at two basis points above the 

minimum initial base assessment rate 

applicable to Risk Category I institutions 

until it receives CAMELS component 

ratings. Thereafter, the assessment rate 

will be determined by annualizing, 

where appropriate, financial ratios 

obtained from all quarterly reports of 

condition that have been filed, until the 

institution files four quarterly reports of 

condition. If a large or highly complex 

institution is considered established 

under § 327.8(m)(4) and (5), but does 

not have CAMELS component ratings, it 

will be given a weighted CAMELS rating 

of 2 for assessment purposes until actual 

CAMELS ratings are assigned. 

(v) Request for review. An institution 

that disagrees with the FDIC’s 

determination that it is a new institution 

may request review of that 

determination pursuant to § 327.4(c). 

(11) Assessment rates for bridge 

depository institutions and 

conservatorships. Institutions that are 

bridge depository institutions under 12 

U.S.C. 1821(n) and institutions for 

which the Corporation has been 

appointed or serves as conservator shall, 

in all cases, be assessed at the Risk 

Category I minimum initial base 

assessment rate, which shall not be 

subject to adjustment under paragraphs 

(d)(5), (6), (7) or (8) of this section. 

5. Revise § 327.10 to read as follows: 

§ 327.10 Assessment rate schedules. 

(a) Initial and Total Base Assessment 

Rate Schedule for Small Institutions and 

Insured Branches of Foreign Banks. The 

initial and total base assessment rate for 

a small insured depository institution or 

an insured branch of a foreign bank 

shall be the rate prescribed in the 

following schedule: 

Risk category I Risk category II Risk category III Risk category IV 

Initial base assessment rate ............................................................ 10–14 22 34 50 

Unsecured debt adjustment ............................................................. ¥5–0 ¥5–0 ¥5–0 ¥5–0 

Secured liability adjustment ............................................................. 0–7 0–11 0–17 0–25 

Brokered deposit adjustment ........................................................... 0–10 0–10 0–10 

TOTAL BASE ASSESSMENT RATE ....................................... 5–21 17–43 29–61 45–85 

All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or maximum rate will vary between 

these rates. All rates shown will increase 3 basis points on January 1, 2011, pursuant to the FDIC Restoration Plan adopted on September 29, 

2009 (74 FR 51062 (Oct. 2, 2009)). 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23543 

(1) Risk Category I Initial Base 

Assessment Rate Schedule. The annual 

initial base assessment rates for all 

institutions in Risk Category I shall 

range from 10 to 14 basis points. 

(2) Risk Category II, III, and IV Initial 

Base Assessment Rate Schedule. The 

annual initial base assessment rates for 

Risk Categories II, III, and IV shall be 22, 

34, and 50 basis points, respectively. 

(3) Risk Category I Total Base 

Assessment Rate Schedule after 

Adjustments. The annual total base 

assessment rates after adjustments for 

all institutions in Risk Category I shall 

range from 5 to 21 basis points. 

(4) Risk Category II Total Base 

Assessment Rate Schedule after 

Adjustments. The annual total base 

assessment rates after adjustments for 

all institutions in Risk Category II shall 

range from 17 to 43 basis points. 

(5) Risk Category III Total Base 

Assessment Rate Schedule after 

Adjustments. The annual total base 

assessment rates after adjustments for 

all institutions in Risk Category III shall 

range from 29 to 61 basis points. 

(6) Risk Category IV Total Base 

Assessment Rate Schedule after 

Adjustments. The annual total base 

assessment rates after adjustments for 

all institutions in Risk Category IV shall 

range from 45 to 85 basis points. 

(7) All institutions in any one risk 

category, other than Risk Category I, will 

be charged the same initial base 

assessment rate, subject to adjustment as 

appropriate. 

(b) Initial and Total Base Assessment 

Rate Schedule for Large Institutions and 

Highly Complex Institutions. The 

annual initial base assessment rate and 

total base assessment rate for a large 

insured depository institution or a 

highly complex insured depository 

institution shall be the rate prescribed 

in the following schedule: 

Large institutions 

Initial base assessment rate ............................................................................................................................................................ 10–50 

Unsecured debt adjustment ............................................................................................................................................................. ¥5–0 

Secured liability adjustment ............................................................................................................................................................. 0–25 

Brokered deposit adjustment ........................................................................................................................................................... 0–10 

TOTAL BASE ASSESSMENT RATE ....................................................................................................................................... 5–85 

All amounts are in basis points annually. Total base rates that are not the minimum or maximum rate will vary between these rates. All rates 

shown will increase 3 basis points on January 1, 2011, pursuant to the FDIC Restoration Plan adopted on September 29, 2009 (74 FR 51062 

(Oct. 2, 2009)). 

(1) Initial Base Assessment Rate 

Schedule for Large Institutions and 

Highly Complex Institutions. The 

annual initial base assessment rates for 

all large institutions and highly complex 

institutions shall range from 10 to 50 

basis points. 

(2) Total Base Assessment Rate 

Schedule for Large Institutions and 

Highly Complex Institutions. The 

annual total base assessment rates for all 

large institutions and highly complex 

institutions shall range from 5 to 85 

basis points. 

(c) Total Base Assessment Rate 

Schedule adjustments and procedures— 

(1) Board Rate Adjustments. The Board 

may increase or decrease the total base 

assessment rate schedule for all insured 

depository institutions up to a 

maximum increase of 3 basis points or 

a fraction thereof or a maximum 

decrease of 3 basis points or a fraction 

thereof (after aggregating increases and 

decreases), as the Board deems 

necessary. Any such adjustment shall 

apply uniformly to each rate in the total 

base assessment rate schedule. In no 

case may such Board rate adjustments 

result in a total base assessment rate that 

is mathematically less than zero or in a 

total base assessment rate schedule that, 

at any time, is more than 3 basis points 

above or below the total base assessment 

schedule for the Deposit Insurance 

Fund, nor may any one such Board 

adjustment constitute an increase or 

decrease of more than 3 basis points. 

(2) Amount of revenue. In setting 

assessment rates, the Board shall take 

into consideration the following: 

(i) Estimated operating expenses of 

the Deposit Insurance Fund; 

(ii) Case resolution expenditures and 

income of the Deposit Insurance Fund; 

(iii) The projected effects of 

assessments on the capital and earnings 

of the institutions paying assessments to 

the Deposit Insurance Fund; 

(iv) The risk factors and other factors 

taken into account pursuant to 12 U.S.C. 

1817(b)(1); and 

(v) Any other factors the Board may 

deem appropriate. 

(3) Adjustment procedure. Any 

adjustment adopted by the Board 

pursuant to this paragraph will be 

adopted by rulemaking, except that the 

Corporation may set assessment rates as 

necessary to manage the reserve ratio, 

within set parameters not exceeding 

cumulatively 3 basis points, pursuant to 

paragraph (c)(1) of this section, without 

further rulemaking. 

(4) Announcement. The Board shall 

announce the assessment schedules and 

the amount and basis for any adjustment 

thereto not later than 30 days before the 

quarterly certified statement invoice 

date specified in § 327.3(b) of this part 

for the first assessment period for which 

the adjustment shall be effective. Once 

set, rates will remain in effect until 

changed by the Board. 

6. Revise Appendix A to Subpart A of 

Part 327 to read as follows: 

Appendix A to Subpart A 

Method To Derive Pricing Multipliers and 

Uniform Amount 

I. Introduction 

The uniform amount and pricing 

multipliers are derived from: 

• A model (the Statistical Model) that 

estimates the probability that a Risk Category 

I institution will be downgraded to a 

composite CAMELS rating of 3 or worse 

within one year; 

• Minimum and maximum downgrade 

probability cutoff values, based on data from 

June 30, 2008, that will determine which 

small institutions will be charged the 

minimum and maximum initial base 

assessment rates applicable to Risk Category 

I; and 

• The maximum initial base assessment 

rate for Risk Category I, which is four basis 

points higher than the minimum rate. 

II. The Statistical Model 

The Statistical Model is defined in 

equations 1 and 3 below: 

Equation 1 

Downgrade (0,1)i,t = b0 + b1 (Tier 1 Leverage 

RatioT) + 

b2 (Loans past due 30 to 89 days ratioi,t) + 

b3 (Nonperforming asset ratioi,t) + 

b4 (Net loan charge-off ratioi,t) + 

b5 (Net income before taxes ratioi,t) + 

b6 (Adjusted brokered deposit ratioi,t) + 

b7 (Weighted average CAMELS component 

ratingi,t) 

Where Downgrade(01)i,t (the dependent 

variable—the event being explained) is 

the incidence of downgrade from a 

composite rating of 1 or 2 to a rating of 

3 or worse during an on-site examination 

for an institution i between 3 and 12 

months after time t. Time t is the end of 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23544 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

a year within the multi-year period over 

which the model was estimated (as 

explained below). The dependent 

variable takes a value of 1 if a downgrade 

occurs and 0 if it does not. 

The explanatory variables (regressors) in 

the model are six financial ratios and a 

weighted average of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’ 

and ‘‘L’’ component ratings. The six financial 

ratios included in the model are: 

• Tier 1 leverage ratio 

• Loans past due 30–89 days/Gross assets 

• Nonperforming assets/Gross assets 

• Net loan charge-offs/Gross assets 

• Net income before taxes/Risk-weighted 

assets 

• Brokered deposits/domestic deposits 

above the 10 percent threshold, adjusted for 

the asset growth rate factor 

Table A.1 defines these six ratios along 

with the weighted average of CAMELS 

component ratings. The adjusted brokered 

deposit ratio (Bi,T) is calculated by 

multiplying the ratio of brokered deposits to 

domestic deposits above the 10 percent 

threshold by an asset growth rate factor that 

ranges from 0 to 1 as shown in Equation 2 

below. The asset growth rate factor (Ai,T) is 

calculated by subtracting 0.4 from the fouryear cumulative gross asset growth rate 

(expressed as a number rather than as a 

percentage), adjusted for mergers and 

acquisitions, and multiplying the remainder 

by 31⁄3. The factor cannot be less than 0 or 

greater than 1. 

Equation 2 

B Brokered Deposits

Domestic Deposits i,T

i,T

i,T

= −

⎛

⎝

⎜

⎜

⎞

⎠

⎟

⎟ 0 10 . ∗ Ai,T

Where 

A

GrossAssets GrossAssets

GrossAssets i,T

i,T i,T

i,T

= − − ⎛

⎝

−

−

4

4

⎜ 0 4. ⎜

⎞

⎠

⎟

⎟∗ ⎡

⎣

⎢

⎢

⎤

⎦

⎥

⎥

10

3 ,

subject to 

0 ≤ Ai,r ≤ 1 and Bi,r ≥ 0. 

The component rating for sensitivity to 

market risk (the ‘‘S’’ rating) is not available for 

years prior to 1997. As a result, and as 

described in Table A.1, the Statistical Model 

is estimated using a weighted average of five 

component ratings excluding the ‘‘S’’ 

component. Delinquency and non-accrual 

data on government guaranteed loans are not 

available before 1993 for Call Report filers 

and before the third quarter of 2005 for TFR 

filers. As a result, and as also described in 

Table A.1, the Statistical Model is estimated 

without deducting delinquent or past-due 

government guaranteed loans from either the 

loans past due 30–89 days to gross assets 

ratio or the nonperforming assets to gross 

assets ratio. Reciprocal deposits are not 

presently reported in the Call Report or TFR. 

As a result, and as also described in Table 

A.1, the Statistical Model is estimated 

without deducting reciprocal deposits from 

brokered deposits in determining the 

adjusted brokered deposit ratio. 

TABLE A.1—DEFINITIONS OF REGRESSORS

Regressor Description 

Tier 1 Leverage Ratio (%) .................................. Tier 1 capital for Prompt Corrective Action (PCA) divided by adjusted average assets based 

on the definition for prompt corrective action. 

Loans Past Due 30–89 Days/Gross Assets (%) Total loans and lease financing receivables past due 30 through 89 days and still accruing interest divided by gross assets (gross assets equal total assets plus allowance for loan and 

lease financing receivable losses and allocated transfer risk). 

Nonperforming Assets/Gross Assets (%) ........... Sum of total loans and lease financing receivables past due 90 or more days and still accruing 

interest, total nonaccrual loans and lease financing receivables, and other real estate owned 

divided by gross assets. 

Net Loan Charge-Offs/Gross Assets (%) ........... Total charged-off loans and lease financing receivables debited to the allowance for loan and 

lease losses less total recoveries credited to the allowance to loan and lease losses for the 

most recent twelve months divided by gross assets. 

Net Income before Taxes/Risk-Weighted Assets 

(%).

Income before income taxes and extraordinary items and other adjustments for the most recent twelve months divided by risk-weighted assets. 

Adjusted brokered deposit ratio (%) ................... Brokered deposits divided by domestic deposits less 0.10 multiplied by the asset growth rate 

factor (which is the term Ai,T as defined in equation 2 above) that ranges between 0 and 1. 

Weighted Average of C, A, M, E and L Component Ratings.The weighted sum of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’ and ‘‘L’’ CAMELS components, with weights of 28 

percent each for the ‘‘C’’ and ‘‘M’’ components, 22 percent for the ‘‘A’’ component, and 11 

percent for the ‘‘E’’ and ‘‘L’’ components. (For the regression, the ‘‘S’’ component is omitted.) 

7. Revise Appendix B to Subpart A of Part 

327 to read as follows: 

Appendix B to Subpart A 

Description of Scorecard Measures 

(1) Scorecard Measures Applied to All Large 

Banks 

Quantitative measures (Data 

Source) Description 

Tier 1 Common Capital Ratio (Call/ 

TFR Reports).

The ratio is calculated as Tier 1 capital less perpetual preferred stock and related surplus divided by average total assets less disallowed intangibles. 

Concentration Measure ................... Concentration score takes a higher score of the following two: 

(1) Higher-Risk Concentrations 

Measure (LIDI).

The measure is a sum of following ratios squared: construction and development loans (C&D), leveraged 

loans, nontraditional mortgages, subprime consumer loans, and total exposure (outstanding loan balances and unfunded commitments) to top 20 single-name borrowers, all as a ratio to tier 1 capital and 

reserves. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.012</MATH> EP03MY10.013</MATH>
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23545 

Quantitative measures (Data 

Source) Description 

(2) Growth-Adjusted Portfolio Concentrations (Call/TFR Reports).The measure is calculated in following steps: 

(1) Concentration levels (as a ratio to total risk-based capital) are calculated for each broad portfolio category (C&D, other commercial real estate loans, residential mortgage (including mortgage-backed securities), commercial and industrial loans, credit card and other consumer loans). 

(2) Three-year merger-adjusted portfolio growth rates are then scaled to a growth factor of 1 and 1.5. If 

three years of data are not available, a growth factor of 1 would be assigned. 

(3) Risk weights are assigned to each category based on relative SCAP loss rates. 

(4) Concentration levels are multiplied by risk weights and growth factor and the resulting value for each 

portfolio is squared and summed. 

Both concentration measures are described in detail in Appendix C. 

Core Earnings/Average Total Assets (Call/TFR Reports).Core earnings are defined as quarterly net income less extraordinary items and realized gains and losses 

on available-for-sale (AFS) and held-to-maturity (HTM) securities, adjusted for mergers. The ratio takes 

a four-quarter sum of merger-adjusted core earnings and divides it by a five-quarter average of total assets. If four quarters of data on core earnings are not available, data for quarters that are available 

would be added and annualized. If five quarters of data on total assets are not available, data for quarters that are available would be averaged. 

Credit Quality Measure: .................. Asset quality score takes a higher score of the following two: 

a. Criticized and Classified Items/ 

Tier 1 Capital and Reserves 

(LIDI).

The sum of criticized and classified items divided by a sum of Tier 1 capital and reserves. Criticized and 

classified items include items with an internal grade of ‘‘Special Mention’’ or worse and include retail 

items under Uniform Retail Classification Guidelines, securities that are rated sub-investment grade, and 

marked-to-market counterparty positions with an internal grade of ‘‘Special Mention’’ or worse, or an external rating of sub-investment grade less credit valuation allowances (CVA). Criticized and classified 

items exclude loans and securities in trading books, and the maximum amount recoverable from the 

U.S. government, its agencies, or government-sponsored agencies, under guarantee or insurance provisions. 

b. Underperforming Assets/Tier 1 

Capital and Reserves (Call/TFR 

Reports).

Sum of loans past due 30–89 days, loans past due 90+ days, nonaccrual loans, restructured loans, restructured 1–4 family loans, and ORE (excluding the maximum amount recoverable from the U.S. government, its agencies, or government-sponsored agencies, under guarantee or insurance provisions) divided by a sum of Tier 1 capital and reserves. 

Core Deposits/Total Liabilities (Call/ 

TFR Reports).

The core deposit ratio is a sum of demand deposits, NOW accounts, MMDA, other savings deposits, CDs 

under $100M less insured brokered deposits under $100,000 divided by total liabilities. 

Unfunded Commitments/Total Assets (Call/TFR Reports).Unfunded commitments are unused portions of commitments to make or purchase extensions of credit in 

the form of loans or participations in loans, lease financing receivables, or similar transactions and include unused commitments for home equity line of credit, commercial real estate, construction and land 

development loans either secured or not secured by real estate, securities underwriting and others, excluding unused commitments for credit card lines. Total amount of unfunded commitments is divided by 

total assets. 

Liquid Assets/Short-term Liabilities 

(Liquidity Coverage Ratio) (Call/ 

TFR Reports).

Liquid assets are defined as the sum of cash and balances due from depository institutions, Federal funds 

sold and securities purchased under agreements to resell, and agency securities (securities issued by 

the U.S. Treasury, U.S. government agencies, and US government-sponsored enterprises) less securities sold under agreements to repurchase or agency securities, whichever is smaller. ‘‘Short-term’’ liabilities are defined as a sum of large CDs (larger than $100,000) with a remaining maturity of one year or 

less, fed funds purchased and repos, unsecured borrowings with a remaining maturity of one year or 

less, foreign deposits and unused commitments for asset-backed commercial paper with a remaining 

maturity of one year or less. 

Potential Losses/Total Domestic 

Deposits (Loss Severity Measure) (Call/TFR Reports).

The loss severity ratio is a ratio of potential losses to the DIF—as calculated in the FDIC’s loss severity 

model—to domestic deposits. Appendix D describes the loss severity model in detail. 

Secured Liabilities/Total Domestic 

Deposits (Call/TFR Reports).

The secured liability ratio is a sum of secured liabilities (FHLB advances, securities sold under repurchase 

agreements, secured Federal funds purchased, and other secured borrowings) divided by domestic deposits. 

(2) Scorecard Measures Applied to Highly 

Complex Institutions Only 

Quantitative measures Description 

10-day 99% VaR/Tier 1 Capital 

(LIDI Reports).

The ratio is defined as 10-day 99%VaR based on banks’ internal model divided by Tier 1 capital. 

Short-term Funding/Total Assets 

(Call/TFR Reports).

The short-term funding ratio is a ratio of a sum of Federal funds purchased and repos to total assets. If 

more granular maturity data are available, we may want to include non-deposit liabilities with a remaining maturity of three months or less. 

Senior Bond Spread (IDC) .............. Quarterly average of median weekly spreads for senior bonds with three to ten years remaining to maturity 

issued by the parent company over comparable-maturity Treasuries. 

Parent TCE Ratio (9–Y Reports) .... The parent TCE ratio is a ratio of a sum of common stock, surplus, undivided profits, accumulated other 

comprehensive income, and other equity capital components less intangible assets to tangible assets 

(total assets less intangible assets). 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23546 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

1The high-risk concentration measure is rounded 

to two decimal points. 2http://www.fdic.gov/news/news/press/2001/ 

pr0901a.html. 3http://www.fdic.gov/regulations/laws/federal/ 

2006/06noticeFINAL.html. 4 Generally, subprime borrowers will display a 

range of credit risk characteristics that may include 

one or more of the following: (1) Two or more 30- 

day delinquencies in the last 12 months, or one or 

more 60-day delinquencies in the last 24 months; 

(2) judgment, foreclosure, repossession, or chargeoff in the prior 24 months; (3) bankruptcy in the last 

5 years; (4) relatively high default probability as 

evidenced by, for example, a Fair Isaac and Co. risk 

score (FICO) of 660 or below (depending on the 

product/collateral), or other bureau or proprietary 

scores with an equivalent default probability 

likelihood; and/or (5) debt service-to-income ratio 

of 50 percent or greater, or otherwise limited ability 

to cover family living expenses after deducting total 

monthly debt-service requirements from monthly 

income. http://www.fdic.gov/news/news/press/ 

2001/pr0901a.html. 

5The growth-adjusted portfolio concentration 

measure is rounded to two decimal points. 

6The cut-off values of 0.2 and 0.8 correspond to 

about 45th percentile and 80th percentile among 

the large institutions, respectively, based on the 

data from 2000 to 2009. 

7The growth factor is rounded to two decimal 

points. 

8Board of Governors of the Federal Reserve 

System, ‘‘The Supervisory Capital Assessment 

Program: Overview of Results,’’ May 7, 2009. http:// 

www.federalreserve.gov/newsevents/speech/ 

bcreg20090507a1.pdf. 

9The risk weights are based on loss rates for each 

portfolio relative to the loss rate for C&I loans, 

which is given a risk weight of 1. 

8. Revise Appendix C to Subpart A of 

Part 327 to read as follows: 

APPENDIX C TO SUBPART A 

Concentration Measures 

The concentration measure score is a 

higher of the two concentration scores: a 

higher-risk concentration measure and a 

growth-adjusted portfolio concentration 

measure. 

1. Higher-Risk Concentration Measure 

The higher-risk concentration measure is 

the sum of the squared value of 

concentrations in each of five risk areas and 

is calculated as: 

Hi

k i

= ⎛

⎝

⎜ ⎞

⎠

⎟ =

∑1

5 2

Amount of exposure

Tier 1 Capital

i,k

Where: 

H is institution i’s higher-risk concentration 

measure and 

k is a risk area.1 The five risk areas (k) are 

defined as: 

• Construction and development loans; 

• Leveraged lending; 

• Nontraditional mortgages; 

• Subprime consumer loans; and 

• Total exposure (outstanding loan 

balances, unfunded commitments and 

counterparty credit risk) to top 20 singlename borrowers. 

Data on higher-risk lending, other than 

construction and development loans, are 

obtained through an examination process and 

defined according to the interagency 

guidance for a given product. A loan is 

considered to be leveraged when the obligor’s 

post-financing leverage as measured by debtto-assets, debt-to-equity, cash flow-to-total 

debt, or other such standards unique to 

particular industries significantly exceeds 

industry norms for leverage.2 Nontraditional 

mortgages are mortgage products that allow 

borrowers to defer payment of principal and, 

sometimes, interest. These products include 

‘‘interest-only’’ mortgages and ‘‘payment 

option’’’ adjustable-rate mortgages.3

Subprime loans are consumer loans that are 

typically made to borrowers with weakened 

credit histories, including a combination of 

payment delinquencies, charge-offs, 

judgments, and bankruptcies who may also 

display reduced repayment capacity as 

measured by credit scores, debt-to-income 

ratios, or other criteria.4

2. Growth-adjusted Portfolio Concentration 

Measure 

The growth-adjusted concentration 

measure is the sum of the squared values of 

concentrations in each of seven portfolios, 

each of the squared values being first 

adjusted for growth and risk weights before 

summing. The measure is calculated as: 

Ni i,k k

i

= ×× g w ⎛

⎝

⎜ ⎞

⎠

⎟ ⎡

⎣

⎢

⎢

⎤

⎦

Amount of exposure

Total Capital

i,k ⎥ = ⎥ ∑

2

1

7

k

Where: 

N is institution i’s growth-adjusted portfolio 

concentration measure 5; 

k is a portfolio; 

g is a growth factor for institution i’s portfolio 

k; and, 

w is a risk weight for portfolio k. 

The seven portfolios (k) are defined based 

on the Call Report data and they are: 

• First-lien residential mortgages and 

mortgage-backed securities; 

• Closed-end junior liens and home equity 

lines of credit (HELOCs); 

• Construction and development loans; 

• Other commercial real estate loans; 

• Commercial and industrial loans; 

• Credit card loans; and 

• Other consumer loans. 

The growth factor, g, is based on a threeyear merger-adjusted growth rate for a given 

portfolio; g ranges from 1 to 1.5 where a 20 

percent growth rate equals a factor of 1 and 

an 80 percent growth rate equals a factor of 

1.5.6 7 For growth rates less than 20 percent, 

g is 1; for growth rates greater than 80 

percent, g is 1.5. For growth rates of 20 

percent to 80 percent, the growth factor is 

calculated as: 

gG G i,k i,k i,k =+ − ( )× −

−

⎡

⎣

⎢ ⎤

⎦

⎥ =+ − ( ) ⎡

⎣

⎢ 1 0 20 15 10

08 02

1 5

6 . 0 20 . .. . . ⎤

⎦

⎥

Where 

G

V

V i,k

i,k,t

i,k,t

= −

−12

1,

V is the portfolio amount as reported on the 

Call Report 

and t is the quarter for which the assessment 

is being determined. 

The risk weight for each portfolio reflects 

relative loss rates and is based on the midpoint of two-year cumulative indicative loss 

rate ranges used in the adverse scenario for 

the interagency Supervisory Capital 

Assessment Program (SCAP) in early 2009.8 9


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.014</MATH> EP03MY10.015</MATH> EP03MY10.016</MATH> EP03MY10.017</MATH>
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23547 

1 In most cases, the model would yield reductions 

in liabilities and assets prior to failure. Exceptions 

may occur for institutions primarily funded through 

insured deposits, which the model assumes to grow 

prior to failure. 2Of course, in reality, runoff and capital declines 

occur more or less simultaneously as an institution 

approaches failure. The loss severity measure 

assumptions simplify this process for ease of 

modeling. 

TABLE C.1—TWO-YEAR CUMULATIVE INDICATIVE LOSS RANGE: SCAP ADVERSE SCENARIO

Portfolio 

Two-year 

cumulative loss range Risk weights 

Minimum Maximum Midpoint 

First-Lien Mortgages* ........................................................... 4.3 5.8 5.1 0.8 

Second/Junior Lien Mortgages ............................................ 12.0 16.0 14.0 2.2 

Commercial and Industrial (C&I) Loans ............................... 5.0 8.0 6.5 1.0 

Construction and Development (C&D) Loans ..................... 15.0 18.0 16.5 2.5 

Commercial Real Estate Loans, excluding C&D** .............. 7.6 9.4 8.5 1.3 

Credit Card Loans ................................................................ 18.0 20.0 19.0 2.9 

Other Consumer Loans ........................................................ 8.0 12.0 10.0 1.5 

* Assumes that 80 percent of first liens are 

prime and the remaining 20 percent at AltA. 

** Assumes that 80 percent of CRE 

portfolio are nonfarm non-residential and the 

remaining 20 percent are multifamily. The 

allocation is based on the aggregate bank 

data. 

9. Add Appendix D to Subpart A of 

Part 327 to read as follows: 

Appendix D to Subpart A 

Description of the Loss Severity Model 

The FDIC’s loss severity model applies a 

standardized set of assumptions to an 

institution’s balance sheet for a given quarter 

to measure possible losses to the FDIC in the 

event of an institution’s failure. To determine 

an institution’s loss severity rate, the size and 

composition of an institution’s liabilities are 

adjusted to reflect expected changes (due to 

uninsured deposit and other unsecured 

liability runoff and growth in insured 

deposits) as an institution approaches failure. 

Assets are then reduced to match any 

reduction in liabilities.1 The institution’s 

asset values are then further reduced until 

the Tier 1 leverage ratio reaches 2 percent.2

Asset adjustments are made pro rata to asset 

categories to preserve the institution’s 

relative proportion of assets by asset 

categories. Assumptions regarding asset 

losses at failure and the extent of secured 

liabilities are then applied to the estimated 

balance sheet at failure to determine whether 

the institution has enough unencumbered 

assets to cover domestic deposits. Any 

projected shortfall is divided by current 

domestic deposits to obtain an end-of-period 

loss severity ratio, which is then averaged 

over the three most recent quarters to 

produce the loss severity measure for the 

scorecard. 

Runoff and Capital Adjustment Assumptions 

Table D.1 contains run-off assumptions. 

TABLE D.1—RUNOFF RATE

ASSUMPTIONS

Liability type Runoff rate* 

(percent) 

Insured Deposits ................... ¥32.0 

TABLE D.1—RUNOFF RATE

ASSUMPTIONS—Continued 

Liability type Runoff rate* 

(percent) 

Uninsured Deposits .............. 28.6 

Foreign Deposits .................. 80.0 

Fed Funds Purchased .......... 40.0 

Repurchase Agreements ...... 25.0 

Trading Liabilities .................. 50.0 

Federal Home Loan Bank 

Borrowings <= 1 Year ....... 25.0 

Federal Home Loan Bank 

Borrowings > 1 Year ......... 0.0 

Other Borrowings <= 1 Year 50.0 

Other Borrowings > 1 Year .. 0.0 

Subordinated Debt and Limited Liability Preferred 

Stock ................................. 15.0 

Other Liabilities ..................... 0.0 

* A negative rate implies growth. 

Given the resulting total liabilities after 

runoff, assets are then reduced pro rata to 

preserve the relative amount of assets in each 

of the following asset categories and to 

achieve a Tier 1 leverage of 2 percent: 

• Cash and Interest Bearing Balances; 

• Trading Account Assets; 

• Fed Funds Sold and Repurchase 

Agreements; 

• Treasury and Agency Securities; 

• Municipal Securities; 

• Other Securities; 

• Construction and Development Loans; 

• Nonresidential Real Estate Loans; 

• Multifamily Real Estate Loans; 

• 1–4 Family Closed-End First Liens; 

• 1–4 Family Closed-End Junior Liens; 

• Revolving Home Equity Loans; and 

• Agricultural Real Estate Loans. 

Recovery Value of Assets at Failure 

Table D.2 shows loss rates applied to each 

of the asset categories as adjusted above. 

TABLE D.2—ASSET LOSS RATE

ASSUMPTIONS

Asset category Loss rate 

(percent) 

Cash and Interest Bearing 

Balances ........................... 0.0 

Trading Account Assets ....... 0.0 

Fed Funds Sold and Repurchase Agreements ............ 0.0 

Treasury and Agency Securities ..................................... 0.0 

Municipal Securities .............. 10.0 

Other Securities .................... 15.0 

Construction and Development Loans ....................... 38.2 

Nonresidential Real Estate 

Loans ................................ 17.6 

Multifamily Real Estate 

Loans ................................ 10.8 

1–4 Family Closed-End First 

Liens .................................. 19.4 

1–4 Family Closed-End Junior Liens ............................ 41.0 

Revolving Home Equity 

Loans ................................ 41.0 

Agricultural Real Estate 

Loans ................................ 19.7 

Agricultural Loans ................. 11.8 

Commercial and Industrial 

Loans ................................ 21.5 

Credit Card Loans ................ 18.3 

Other Consumer Loans ........ 18.3 

All Other Loans ..................... 51.0 

Other Assets ......................... 75.0 

Secured Liabilities at Failure 

Table D.3 shows the percentage of each 

liability category that is assumed to be 

secured. 

TABLE D.3—SECURED LIABILITY

ASSUMPTIONS

Liability type 

Percentage 

secured at failure 

(percent) 

Foreign Deposits .................. 100 

Repurchase Agreements ...... 100 

Federal Home Loan Bank 

Borrowings <= 1 Year ....... 100 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
23548 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

TABLE D.3—SECURED LIABILITY

ASSUMPTIONS—Continued 

Liability type 

Percentage 

secured at failure 

(percent) 

Federal Home Loan Bank 

Borrowings > 1 Year ......... 100 

Other Borrowings <= 1 Year 50 

TABLE D.3—SECURED LIABILITY

ASSUMPTIONS—Continued 

Liability type 

Percentage 

secured at failure 

(percent) 

Other Borrowings > 1 Year .. 50 

Loss Severity Ratio Calculation 

The FDIC’s loss given failure (LGD) is 

calculated as: 

LGD = InsuredDeposits

DomesticDeposits

Domestic Failure

Failure

× Deposits eryValueofAssets SecuredLiabi Failure Failure − + Recov lities ( ) Failure

An end-of-quarter loss severity ratio is LGD 

divided by total domestic deposits at quarterend and the loss severity measure for the 

scorecard is an average of end-of-period loss 

severity ratio for three most recent quarters. 

9. Add Appendix E to Subpart A of 

Part 327 to read as follows: 

Appendix E to Subpart A 

Additional Risk Considerations for Large 

Institutions 

Information Source Examples of Associated Risk Indicators or Information 

Adequacy of Capital to Withstand Stress (Level and Trend) 

• Regulatory capital ratios 

• Capital composition 

• Unrealized losses on securities 

• Dividend payout ratios 

• Internal capital growth rates relative to asset growth 

• Robustness of internal stress testing models and reserve methodology 

Adequacy and Stability of Earnings to Withstand Stress (Level and Trend) 

• Return on assets and return on risk-adjusted assets 

• Concentration of revenue sources 

• Earning composition including noncash earnings e.g., mortgage servicing rights (MSR), 

income from interest reserves) relative to core income 

• Net interest margins, funding costs and volumes, earning asset yields and volumes 

• Loan loss provisions relative to problem loans 

• Historical volatility of various earnings sources 

Additional Performance Indicators Ability to Withstand Credit-Related Stress (Level and Trend) 

• Loan and securities portfolio composition and volume of higher risk lending activities or 

securities 

• Loan performance measures (past due, nonaccrual, classified and criticized, and renegotiated loans) 

• Portfolio characteristics such as internal loan rating and credit score distributions, internal 

estimates of default, internal estimates of loss given default, and internal estimates of exposures in the event of default 

• Portfolio underwriting characteristics and trends (including portfolio growth) 

• Robustness of credit administration and credit risk monitoring (e.g., internal loan classification) 

• Off-balance sheet credit exposure measures (unfunded loan commitments, securitization 

activities, counterparty derivatives exposures) and hedging activities 

Ability to Withstand Liquidity-Related Stress (Level and Trend) 

• Composition of deposit and non-deposit funding sources 

• Liquid resources relative to short-term obligations, undisbursed credit lines, and contingent liabilities 

• Reliance on securitization as a funding source 

• Level of contingent liabilities 

• Robustness of contingency or emergency funding strategies and analyses 

Ability to Withstand Interest Rate Shocks 

• Maturity and repricing information on assets and liabilities, interest rate risk analyses 

• Robustness of internal interest rate models 

Ability to Withstand Trading Stress (Level and Trend) 

• Assessment of trading desk composition and revenue dependency (prop trading compared to customer flow, liquid products compared to illiquid products) 

• Assessment of VaR framework, stress testing framework and results 

• Appropriateness of desk limits. 

Ability to Withstand Stress to Counterparties (Level and Trend) 

• Gross current exposure (Top 5 and Total by Client Types and Ratings) to capital 

• Current net exposure (Top 5 and Total by Client Types and Ratings) to capital 

• Peak potential exposure (Top 5 and Total by Client Types and Ratings) to capital 

• Exposure aggregation reporting 

• Margining policies, netting enforceability and hedging capabilities. 

Market indicator of the institution’s ability to withstand stress (Level and Trend) 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.018</MATH>
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23549 

1For the purpose of regression analysis, large 

institutions that received significant government 

support or merged with another entity with 

government support. 

2The FDIC has conducted a number of robustness 

tests with alternative ratios for capital and earnings, 

a log transformation of several variables—the 

liquidity coverage ratio, the brokered deposit ratio 

and the growth-adjusted concentration ratio—and 

alternative dependent variables—CAMELS and the 

FDIC’s internal risk ratings. These robustness tests 

show that the same set of variables are generally 

statistically significant in most models; that 

converting to a score from a raw ratio generally 

resolves any potential concern related to a 

nonlinear relationship between the dependent 

variable and several explanatory variables; and, 

finally, that alternative ratios for capital and 

earnings are not better in predicting expert 

judgment ranking or failure. 

Information Source Examples of Associated Risk Indicators or Information 

• Subordinated debt spreads 

• Credit default swap spreads 

• Parent’s equity price volatility 

• Market-based measures of default probabilities 

• Rating agency watch lists 

• Market analyst reports 

Additional Loss Severity Indicators ..................... • Ability to identify and describe discreet business units within the banking legal entity 

• Funding structure considerations relating to the order of claims in the event of liquidation 

(including the extent of subordinated claims and priority claims). 

• Volumes of brokered deposits, potentially more volatile deposits such as Internet or 

money desk or high-cost deposits. 

• Potential for significant ring-fencing of foreign assets. 

• Volume of hard-to-value assets (Level 3 assets) 

Note: The following Appendices will 

not appear in the Code of Federal 

Regulations. 

Appendix 1 

Statistical Analysis of Measures 

The risk measures included in the 

scorecard and the weights assigned to those 

measures are generally based on the results 

of an ordinary least square (OLS) model, and 

in some cases, a logistic regression model. 

The OLS model estimates how well a set of 

risk measures in 2005 through 2009 can 

predict the FDIC’s view, based on its 

experience and judgment, of the proper rank 

ordering of risk (the expert judgment ranking) 

for large institutions as of year-end 2009. 

The OLS model is specified as: 

Ranking Score i, k i,k,t

k

n

2009 0

1

=+ × =β β ∑

Where: 

k is a risk measure; 

n is the number of risk measures; and 

t is the quarter that is being assessed 

The logistic regression model estimates 

how well the same set of risk measures in 

2005 through 2008 can predict whether a 

large bank fails and it is specified as: 

Fail Score i k i,k,t

k

n

(,) 0 1 0

1

=+ × =β β ∑

Where: 

Fail is whether an institution i failed on or 

prior to year-end 2009 or not.1

Selecting Risk Measures2

To select the risk measures for the 

scorecard, the FDIC first selected a set of 

financial measures that were deemed to be 

most relevant to assessing large institutions’ 

ability to withstand stress. Those measures 

were converted to a score between 0 and 100 

and then regressed against the expert 

judgment ranking. A stepwise selection 

method was used to select risk measures for 

each year that were statistically significant at 

a 15 percent confidence level or better. 

Table1.1 shows the risk measures that were 

considered and descriptive statistics of scores 

for those measures for large institutions 

based on data from 2005–2009. Most of these 

measures, other than concentration and 

credit quality measures, are based on report 

of condition and income data and defined in 

Appendix 1. The concentration measure is 

described in detail in Appendix 2. A 

distance-to-default measure is calculated as a 

sum of Tier 1 capital and 12-quarter average 

core earnings—both divided by total assets— 

divided by the 12-quarter standard deviation 

in core earnings. The three-year mergeradjusted asset growth rate (AG) is calculated 

as: 

AG Asset

Asset

t

t

=

−12

Where t is the quarter for which the 

assessment is being determined. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.019</MATH> EP03MY10.020</MATH> EP03MY10.021</MATH>
23550 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

TABLE 1.1—DESCRIPTIVE STATISTICS OF RISK MEASURE SCORES

Risk measure Average score Median score 

Standard 

deviation of 

scores 

Weighted average CAMELS rating ............................................................................................. 41.4 39.9 14.3 

Tier 1 common leverage ratio ..................................................................................................... 65.4 74.7 30.5 

Distance-to-default ....................................................................................................................... 62.2 73.7 34.8 

Concentration measure ............................................................................................................... 52.2 46.0 36.3 

Three-year merger-adjusted asset growth rate ........................................................................... 27.0 15.7 30.5 

Core earnings/average assets ..................................................................................................... 56.6 55.4 30.0 

Credit quality measure ................................................................................................................. 43.2 33.7 35.2 

Core deposits/total liabilities ........................................................................................................ 41.5 33.2 32.9 

Liquidity coverage ratio ................................................................................................................ 75.1 89.9 31.5 

Unfunded commitments/total assets ........................................................................................... 49.1 51.4 32.1 

Short-term funding/total assets .................................................................................................... 32.8 24.8 31.8 

Loss severity ratio ........................................................................................................................ 43.3 43.5 30.0 

Secured liabilities/total domestic deposits ................................................................................... 31.3 21.2 31.7 

Brokered deposits/total domestic deposits .................................................................................. 22.3 5.7 33.8 

Table 1.2 shows the results of the OLS 

models after a stepwise selection process and 

the statistical significance of each measure 

for years 2005 through 2009. The dependent 

variable for the model is an expert judgment 

ranking as of year-end 2009. The measures 

numbered (1) through (9) are statistically 

significant and have a positive sign in 

regression models for multiple years. Those 

measures include a weighted average 

CAMELS rating, a concentration measure, a 

core earnings to average total assets ratio, a 

credit quality measure, a core deposits to 

total liabilities ratio, an unfunded 

commitments to total assets ratio, a liquid 

assets to short-term liabilities ratio, a loss 

severity measure, and a secured liabilities to 

total domestic deposits ratio. The measures 

without coefficients are those that are not 

statistically significant at a 15 percent 

confidence level. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23551 

Table 1.3 shows the results of the logistic 

regression models with a stepwise selection 

process, and the statistical significance of 

each measure for years 2005 through 2008. 

The dependent variable for the model is 

whether an institution failed before year-end 

2009 or not. The risk measures numbered (1) 

through (5) are statistically significant and 

have a positive sign in regression models for 

multiple years. Two additional measures— 

credit quality measure and unfunded 

commitments/total assets— are significant in 

a regression model for a single year. One 

measure—a Tier 1 common capital ratio— 

that is not significant in the OLS model are 

significant in the logistic regression model. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.022</GPH>
23552 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

Determining Risk Measures Weights 

Table 1.4 shows the results of the OLS 

model with all ten risk measures that were 

significant in predicting either the expert 

judgment ranking or failure. The weights 

assigned to each of ten risk measures in the 

scorecard are generally, but not entirely, 

based on the coefficients for OLS models for 

2006 and 2007. For example, the coefficient 

for the core earnings to average total asset 

ratio is 0.16 in 2007, and the proposal assigns 

a weight of 15 percent to core earnings to 

calculate an institution’s ability to withstand 

asset-related stress score. The coefficients for 

the concentration measure and credit quality 

measure are 0.34, and a 35-percent weight is 

assigned to each of these measures. The 

coefficient for the liquid assets to short-term 

funding (liquidity coverage) ratio is 0.14 in 

2007 and the proposal assigns a weight of 20 

percent to the liquidity coverage ratio to 

calculate an institution’s ability to withstand 

funding-related stress score. The coefficients 

for the core deposits to total liabilities ratio 

and the unfunded commitments to total 

assets ratio are 0.20 and 0.12, respectively, in 

2006 (and 0.10 and 0.16, respectively, in 

2007), and a 40-percent weight is assigned to 

both these measures to calculate an 

institution’s ability to withstand fundingrelated stress score. 

The weights assigned to the Tier 1 common 

capital ratio, the 10-day 99-percent VaR to 

Tier 1 capital ratio, and the short-term 

funding to total assets ratio are not based on 

the OLS regression. For the Tier 1 common 

capital ratio, the 15-percent weight assigned 

in the large institution scorecard (and the 10- 

percent weight assigned in the highly 

complex institution scorecard) reflects its 

importance in predicting bank failure. A 10- 

day 99-percent VaR to Tier 1 capital ratio is 

a consistent measure of market risk that is 

important for highly complex institutions. 

Finally, while the OLS regression does not 

show a statistical significance, reliance on 

short-term funding had an effect on how 

highly complex institutions fared over the 

past four years. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.023</GPH>
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23553 

OLS regression results: CAMELS and the 

Current Small Bank Financial Ratios 

Table 1.5 shows the results of the OLS 

regression model with the weighted average 

CAMELS rating only. These results show that 

while the weighted average CAMELS rating 

is statistically significant in predicting an 

expert judgment ranking as of year-end 2009, 

it only explains a small percentage of the 

variation in the year-end 2009 expert 

judgment ranking—particularly in models for 

2005 (10 percent) through 2007 (19 percent). 

Table 1.6 shows the results of the OLS 

regression model with a weighted average 

CAMELS rating and the current small bank 

financial ratios. These results show that 

adding financial ratios improves the ability to 

predict the year-end 2009 expert judgment 

ranking; however, the improvement is not as 

significant as in the model with proposed 

measures. For example, in 2006, the model 

with current small bank financial ratios 

would have predicted slightly over 20 

percent of the variation in the current expert 

judgment ranking. This compares to nearly 

50 percent for the model with proposed 

measures. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.024</GPH> EP03MY10.025</GPH>
23554 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

3For the purpose of regression analysis, large 

institutions that received significant government 

support or merged with another entity with 

government support are deemed to have failed. 

Appendix 2 

Conversion of Total Score Into Initial Base 

Assessment Rate 

The formula for converting an institution’s 

total score into an initial assessment rate is 

based on a single-variable logistic regression 

model, which uses an institution’s total score 

as of year-end 2006 to predict whether the 

institution has failed on or before year-end 

2009. The logistic model is specified as: 

Fail(0,1)i = ¥7.7660 + (0.0875 × Score i,2006) 

Where: 

Fail is whether an institution i failed on or 

before year-end 2009 or not; and 3

Score is an institution i’s total score as of 

year-end 2006. 

The plotted points in Chart 5.1 show the 

estimated failure probabilities for the actual 

total scores using the logistic model and the 

results are nonlinear. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.026</GPH>
Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 23555 

The proposed calculation of the initial 

assessment rates approximates this nonlinear 

relationship for scores between 30 and 90. A 

score of 30 or lower results in the minimum 

initial base assessment rate and a score of 90 

or higher results in the maximum initial base 

assessment rate. Assuming an assessment 

rate range of 40 basis points, the initial base 

assessment rate for an institution with a score 

greater than 30 and less than 90 would be: 

Rate MinimumRate Score= −+ ×⎛

⎝

⎜ ⎞

⎠

⎟

⎛

⎝

⎜

⎜

⎞

⎠

⎟

⎟ 0 165289 68 02027

100

5

. .

Appendix 3 

Analysis of the Projected Effects of the 

Payment of Assessments on the Capital and 

Earnings of Insured Depository Institutions 

This analysis estimates the effect in 2010 

of deposit insurance assessments on the 

equity capital and profitability of all insured 

institutions, based on the total base 

assessment rates adopted in the final rule. 

For purposes of determining pre-tax, preassessment income in 2010, the analysis 

assumes that income in 2010 will equal 

annualized income for the second half of 

2009, adjusted for mergers. 

While deposit insurance assessments 

(whatever the rate) generally will result in 

reduced institution profitability and 

capitalization compared to the absence of 

assessments, the reduction will not 

necessarily equal the full amount of the 

assessment. Two factors can mitigate the 

effect of assessments on institutions’ profits 

and capital. First, a portion of the assessment 

may be transferred to customers in the form 

of higher borrowing rates, increased service 

fees and lower deposit interest rates. Since 

information is not readily available on the 

extent to which institutions are able to share 

assessment costs with their customers, 

however, this analysis assumes that 

institutions bear the full after-tax cost of the 

assessment. Second, deposit insurance 

assessments are a tax-deductible operating 

expense; therefore, the assessment expense 

can lower taxable income. This analysis 

considers the effective after-tax cost of 

assessments in calculating the effect on 

capital. 

An institution’s earnings retention and 

dividend policies also influence the extent to 

which assessments affect equity levels. If an 

institution maintains the same dollar amount 

of dividends when it pays a deposit 

insurance assessment as when it does not, 

equity (retained earnings) will be less by the 

full amount of the after-tax cost of the 

assessment. This analysis instead assumes 

that an institution will maintain its dividend 

rate (that is, dividends as a fraction of net 

income) unchanged from the weighted 

average rate reported over the four quarters 

ending December 31, 2009. In the event that 

the ratio of equity to assets falls below 4 

percent, however, this assumption is 

modified such that an institution retains the 

amount necessary to achieve a 4 percent 

minimum and distributes any remaining 

funds according to the dividend payout rate. 

The proposed changes involve increases in 

premiums for some institutions and 

reductions in premiums for other 

institutions. Because overall revenue remains 

almost constant, the effect on aggregate 

earnings and capital is small. Projections 

show that imposition of the new premiums 

will increase aggregate capital by 2 onehundredths of one percent (0.02 percent) 

over one year. For institutions whose initial 

earnings are positive, the change in 

premiums will increase earnings by an 

average of 0.87 percent (on an asset weighted 

basis). For institutions whose initial earnings 

are negative, the change in premiums will 

increase losses by an average of 0.85 percent 

(on an asset weighted basis). 

There are two institutions for which the 

imposition of the new premiums would make 

a critical difference that would cause their 

tier 1 capital ratio to fall below 2 percent over 

a one-year horizon. A check was also made 

whether the imposition of the new premiums 

would make a difference in whether an 

institution’s equity-to-capital ratio would fall 

below 4 percent in a one-year horizon, but 

there are no institutions critically affected in 

this way. 

Among current Risk Category I institutions, 

6,030 institutions’ assessment rates would 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2EP03MY10.027</GPH> EP03MY10.028</MATH>
23556 Federal Register / Vol. 75, No. 84 / Monday, May 3, 2010 / Proposed Rules 

decrease, 28 institutions’ assessment rates 

would increase and 2 institutions’ 

assessment rates would remain unchanged. 

All of the institutions whose rates would 

increase are large institutions as currently 

defined. For institutions whose assessment 

rates would decrease and whose earnings 

would otherwise be positive, earnings would 

increase by an average of 1.2 percent (on an 

asset weighted basis). For institutions whose 

assessment rates would decrease and whose 

earnings would otherwise be negative, losses 

would decline by an average of 1.0 percent 

(on an asset weighted basis). For institutions 

whose assessment rates would increase and 

whose earnings would otherwise be positive, 

earnings would decrease by an average of 1.6 

percent. For institutions whose assessment 

rates would increase and whose earnings 

would otherwise be negative, losses would 

increase by an average of 4.8 percent. 

Among current Risk Category II 

institutions, 11 institutions’ assessment rates 

would decrease, 16 institutions’ assessment 

rates would increase and 1,182 institutions’ 

assessment rates (including the rates for all 

small Risk Category II institutions) would 

remain unchanged. For institutions whose 

assessment rates would decrease and whose 

earnings would otherwise be positive, 

earnings would increase by an average of 

25.5 percent (on an asset weighted basis). For 

institutions whose assessment rates would 

decrease and whose earnings would 

otherwise be negative, losses would decline 

by an average of 2.1 percent (on an asset 

weighted basis). For institutions whose 

assessment rates would increase and whose 

earnings would otherwise be positive, 

earnings would decrease by an average of 2.5 

percent (on an asset weighted basis). For 

institutions whose assessment rates would 

increase and whose earnings would 

otherwise be negative, losses would increase 

by an average of 4.1 percent (on an asset 

weighted basis). 

Among current Risk Category III and IV 

institutions, 728 out of 729 institutions’ 

assessment rates would increase. For 

institutions whose assessment rates would 

increase and whose earnings would 

otherwise be positive, earnings would be 

reduced by an average of 0.9 percent (on an 

asset weighted basis). For institutions whose 

assessment rates would increase and whose 

earnings would otherwise be negative, losses 

would increase by an average of 1.0 percent 

(on an asset weighted basis). 

By order of the Board of Directors. 

Dated at Washington, DC, this 13th day of 

April 2010. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

[FR Doc. 2010–10161 Filed 4–30–10; 8:45 am] 

BILLING CODE 6714–01–P 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2